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Mining 2018: Roundtable

Who’s Who Legal brings together Oscar Benavides at Rodrigo Elías & Medrano Abogados, Darrell Podowski at Cassels Brock & Blackwell and Casper Herler at Borenius Attorneys to discuss recent developments in the international mining space including the recovery of commodity prices, key client issues and the relationship between the natural resources sector and politics. 

Roundtable mining

 

 

 

 

 

 

The prices of many commodities have finally started to rise again in the past year after a long slump. How has your work been affected by this change?

Oscar Benavides: The rise of commodities prices has resulted in an increase in legal work around exploration projects. We are seeing, again, an active interest among many companies (not only junior companies) in greenfield projects. Joint ventures are being closed and exploration permits increasingly filed. We are also working more and more with clients on reassessing their approach to the projects they have, but which were placed on hold during harder times. Mining investment in Peru over the period 2016-2021 has been valued by Peru’s Ministry of Energy and Mines at around US$46.4 billion (from which approximately 70 per cent is related to copper projects). This should give an approximate idea of what current expectations are.

Darrell Podowski: The downturn in commodities prices two years ago had a significant effect on most of the junior mining companies as their access to capital was severely diminished. However, the rise in commodities prices over the past year has revitalised the outlook for junior and major mining companies, and enabled them to access the capital markets again. M&A activity significantly increased as a result, with the major and junior companies all looking to acquire or be part of joint venture assets around the globe.

Casper Herler: We have recently seen an increase in junior activity with new companies entering the Finnish market. We can also clearly see an increase in interest towards Finland as a potential host country. This has generated an increase in mining-related transactional work. A significant part of our practice is to assist existing major mining operations with development projects, and project development for more advanced-stage projects – many of which have continued, despite previous low prices.

What are the most pressing issues for mining clients in your jurisdiction at the moment? How are you assisting them?

Oscar Benavides: At the risk of simplification, I would say that obtaining the permits required to lawfully conduct an operation, and successfully engage with local stakeholders (some call this obtaining the “social licence”), is nowadays the most pressing issue for mining companies in Peru. 

These are matters for which having sound and experienced legal assistance is essential. This is the case not only in terms of providing concrete legal solutions to help clients navigate the complex bureaucratic seas, so as to ensure an efficient and flawless path; but also (and I would like to emphasise this) providing strategic advice on how to engage with local stakeholders and how to uphold their standards in Peru, regardless of the cultural and legal differences. Sharing the wealth of experience gathered from working with projects (and dealing with local and national authorities) all around the country for more than 50 years is appreciated by clients. 

Darrell Podowski: There are many issues affecting the productivity and profitability of mining clients in Canada. Mining industry financiers are under stress and the overall slowdown in the global mining sector has forced large mining players to declare impairments. For junior mining companies, the lack of access to capital is hurting their values and pushing some towards insolvency or changes in business. In addition, financing costs are on the rise and there is increased difficulty in raising new debt. As a result, alternative financing – such as metal streaming transactions and royalty transactions – is still on the rise. Although concerns persist about the cost of metal streaming deals, for many mining companies, equity financings are not usually an attractive option. With streaming, portions of an asset can be quickly monetised. While a miner’s costs of capital may be quite high, we believe that streaming is here to stay. Such streaming transactions were initially put in place on in-production or fairly advanced projects, but there is now a trend for such transactions to be put in place on more early-stage projects. Thus, more and more junior companies have access to capital through these streams than before. 

We assist our clients not only in negotiating these alternative financing methods, but also in introducing them to potential financiers, and in structuring other innovative alternative financing methods. 

Casper Herler: Finland, as a Nordic country and a member of the EU, is a very intensely regulated operational environment – especially when it comes to environmental legislation. One major mining-related environmental incident in Finland has caused governmental authorities, NGOs and the general public to direct substantial attention to water management, discharges and dam structures. This has generated more legal work related to permit procedures, and compliance and investigation issues. Simultaneously, exploration in protected areas causes a lot of attention, and environmental authorities apply stringent measures and monitoring to ensure compliance. Clients are in need of much support in strategic project planning and in seeking new ways to advance projects without compromising compliance and corporate responsibility.  

Which countries or regions are growth areas for mining projects and why?

Oscar Benavides: Peru (a world leader in the production of several metals) has all the essential conditions to continue building a robust mining industry and to expand it significantly. Its track record of significant and successful mines, its huge geological potential (experts agree that Peru is very much under explored) and its still-competitive production costs are contributing factors to its capability in this regard. Exemplifying the low-production-costs aspect is the comparatively low cost of energy. To give you an idea, as a result of the existing energy offer surplus in the market (which is estimated at approximately 40 per cent), mining companies operating in Peru have been able to close deals with energy suppliers that have enabled a reduction in energy costs totalling as much as 40 per cent. A generally stable legal framework and a growing economy are also contributing factors. 

Regionally speaking, Latin America is still considered an attractive destination for mining investment – not only because of the high-potential geology, but also because of its general political stability (exceptions apply) and lower costs when compared to other geologically attractive regions. There are countries such as Chile that have a long tradition of successful mining endeavours, and generations of experienced mining professionals. I should also mention Ecuador, which has recently become an increasingly attractive destination for mining investments in the region, led by the success that Lundin Gold has had with its Fruta del Norte project. 

Darrell Podowski: In the case of exploration, there is Latin America (Mexico, Chile, Peru, Brazil, Argentina and Colombia) and Africa (in particular Zambia). In the case of M&A, I would say North America, Asia Pacific and Latin America. 

Growth in areas such as Latin America and Africa has accelerated due to the liberalisation of mineral policies and the opening up of large tracts of land to foreign investors. In addition, a number of these higher-risk jurisdictions are implementing new mining codes that provide for more transparency when exploring and developing mineral resources. Advances in technology have also enabled more effective exploration, viable processing of low-grade and complex minerals, as well as safer mining operations, making higher-risk jurisdictions more accessible.

Major mining companies appear to have exited some of the high-risk jurisdictions, however. Deals in high-risk jurisdictions are harder to justify amid greater shareholder scrutiny on capital allocation. As a result, M&A activity across higher-risk jurisdictions tends to be dominated by Chinese state-owned enterprises (SOEs) rather than the major mining companies. 

Casper Herler: Due to the overall political stability and high level of governance provided by the Nordic societies, the Nordics – and in particular, Finland and Sweden – have been jurisdictions of interest in an era where projects with less risk have been targeted by investors.

Is mining becoming less of an international practice area?

Oscar Benavides: In an increasingly globalised world, and in an industry such as mining – where resources are scattered and sought after all around the world by companies that hold interests, and may have raised capital, from investors coming from many different jurisdictions – there is no doubt in my mind that mining is increasingly becoming an international practice area for lawyers. 

It is very common these days to work with clients on implementing the standards that they have decided to apply in the jurisdiction where they will invest, some of which do not match with domestic standards. These standards range all across the board, from environmental to ethical and compliance. The international component of a mining legal practitioner is no longer limited to tax planning and structuring M&A deals.

Darrell Podowski: In general, I would say no; however, as mentioned in the previous question, deals in higher-risk jurisdictions are becoming more difficult to justify for some of the major companies. In addition, as some countries are increasing taxes or requiring foreign mining companies to divest some equity stakes to local governments, mining companies are avoiding some countries – which results in a less international practice area.

Casper Herler: Finnish mining companies are currently not active with outbound mining investments. Hence, our practice is very much focused on inbound exploration and mining investments. The Finnish capital markets have not been well regarded as a forum suited for raising capital for early-stage projects, and therefore companies active in Finland raise their equity on other markets, which automatically brings an international element to most exploration and mining projects.

How well or how easily do the worlds of politics and natural resources interact? Is this interaction changing? 

Oscar Benavides: The worlds of politics and natural resources are definitively linked. A lot, I would say. Politics have had a clear and direct influence over natural resources policies and legislation throughout time. 

Unfortunately, it seems quite difficult for politicians to draw a line (and understand the differences) between what should be a long-term state policy aimed at developing a country’s natural resources with a modern sustainability approach, and the decisions that every government must make on how to deal with current projects or how to address the legitimate concerns that many stakeholders may have. 

Paradoxically, it appears that in precisely those countries where the development of robust domestic natural resources industries should be seen as the obvious tool to accomplish certain development goals (because other sectors still need to follow a longer-term path to create a positive impact in the economy), politicians tend to fail in making the above distinction.

Darrell Podowski: Politics has always had a role to play in the development of natural resources in a country. A government can be in favour of the mining industry, making the permissions process for mines and projects easy and quick; or they can be pro-environment, making the permissions process more time-consuming or even blocking projects from moving forward. This is probably changing, as governments are increasingly politicising resource projects during election campaigns and while in office. 

Casper Herler: Resource policies and regulation have close ties. One of the main challenges is the fact that mining has many stakeholders. It also unleashes a lot of economic value, and has a large-scale impact on a project level. These features give rise to a lot of political and media attention, and risk unexpected changes in regulation, eg, as reactions to individual incidents and concerns. Simultaneously, in order for a jurisdiction to be successful as a mining jurisdiction there is a need for long-term policies that create stability, which in turn is favoured by investors.

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