The International Who’s Who of Mining Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing mining lawyers today
Macleod Dixon LLP
Abdón H Hernández
Martinez Carrera & Hernández, SC
GROWTH IN THE MINING SECTOR
Who’s Who Legal: The International Who’s Who of Mining Lawyers 2010 features lawyers from more jurisdictions than any previous edition. Which jurisdictions are emerging as mining markets to watch?
Philip Christensen: From an Australian perspective, I believe Indonesia will continue to emerge as a mining market - particularly with the new mining laws enacted last year. Domestically, I see the resurgence of investment from Japan and the emergence of investment from China and India as the really significant developments in the Australian market.
Abdón Hernández: Considering markets for mining products, I’d say India and China and then Brazil would be leading. For locations where mining activities may increase, then it would be Argentina, China, Namibia, Congo.
Glenn Faass: Over the past two years, our practice has seen a real upsurge in interest in projects in the DRC, Colombia and Brazil. At the same time, Russia and Kazakhstan have remained strong.
Who’s Who Legal: It has been said that much of the current activity in the mining sector is driven by China. What evidence have you seen to support this? In your view are these levels sustainable?
Abdón Hernández: As long as the worldwide financial crisis isn’t reversed, current mining activity will remain at current levels. Although if the crisis is reversed, the EU countries, USA, Canada, Japan, China, India and Brazil would drive the mining sector upwards. According to the Metals Economics Group, exploration in industrial or base metals is increasing – but the Fraser Institute reports that a lot of exploration activities will be curtailed.
Philip Christensen: In Australia, we’re seeing strong investment flows from Chinese state-owned enterprises into the Australian mining sector. This covers all minerals, but especially iron ore and coal. I see this continuing over the long term, which reflects the basic economic drivers of China’s development. One issue emerging in Australia is the foreign investment policy in relation to investment by Chinese state-owned enterprises. This has become a matter to watch, and will continue to be so as Chinese investment continues.
Glenn Faass: Chinese investment was heavily overweighted over the last year, and it’s not very clear to me why it would decline in volume.
And with confidence returning, there’s been an upswing this fall in M&A activity and the availability of exploration funding from other sources. If the economic cycle continues upwards, we should see a return to a more normal geographic distribution of investment and an improvement in overall activity levels.
REGULATION AND PROTECTION
Who’s Who Legal: Many of the lawyers we consulted in our research noted that certain governments have been discouraging the efforts of foreign mining companies trying to enter their jurisdiction. Have you noticed an increase in protectionist measures in mining policy as a result of the credit crunch?
Glenn Faass: There will always be governments welcoming mining investment and governments distancing themselves from it. Their respective approaches will vary over time, primarily due to domestic imperatives but also external economic factors. We haven’t seen resource nationalism in the mining industry at the same levels experienced by the petroleum industry.
Philip Christensen: We haven’t noticed any increasing protectionist measures, as a result of the credit crunch or for any other reason. Australia, with its relatively low domestic capital base, encourages foreign investment in the mining sector. That’s been the case for a long time now, and it’ll continue in the future. This isn’t to be confused with the current policy issues with Australia’s foreign investment policy in relation to investment by state-owned enterprises – this has been tested, at present, by Chinese state-owned enterprises. The primary concern here is that the investee companies will behave in a market-oriented fashion.
Abdón Hernández: In the worldwide competition to attract foreign investment, in light of the dire current financial and economic situation, Mexico’s federal government is enhancing its efforts to attract foreign investment in the mining sector. But some members of Mexico’s Congress are trying to impose additional taxes and levies on mining activities, which would discourage investment in mining and decrease Mexico’s competitiveness. There aren’t any protectionist measures being contemplated.
THE CURRENT CLIMATE
Who’s Who Legal: How have current economic conditions affected mining concerns in your jurisdiction? Do you see the current rise in commodity prices as sustainable?
Abdón H Hernández: Current economic conditions have certainly affected mining activities in Mexico. Exploration has decreased and expansions of current operations are being postponed.
Philip Christensen: The global financial crisis had a number of effects. With the retraction of credit and general market nervousness many developments were put on hold. To the extent to which debt funding was to be utilised, that dried up with the result that funding was from either capital raising or joint venturing – often with new entrants such as Indian and Chinese companies.
Glenn Faass: Our practice – and my own – is spread very widely geographically. This gives us a considerable hedge against declines in specific jurisdictions. However, we had an outgoing tide that lowered all boats – namely the limited availability of exploration funding, which hit juniors and midcaps especially hard. That seems to be turning around.
Abdón Hernández: As to the current rise in commodity prices, it’s difficult to make a forecast unless you have a reliable ‘crystal ball’. It all depends on the reversal of the current economic or financial conditions of developed countries.
Glenn Faass: I understand that projections for the next few years are mostly that we will not see average mineral prices in 2007/08 ranges, except perhaps for a few metals – most likely including gold. This seems logical to me.
Philip Christensen: During this year, particularly in the coal sector, we’ve seen resurging interest as there seems to be a level of confidence in the market, and this has sustained prices over the medium-to-long term. The capital markets in the junior exploration end of the resources business have been sorely hit, and IPOs and small-scale rights issues are difficult. However, there appear to be signs that in certain sectors, for example coal – even at the more junior end – IPOs and other capital raisings may be successful. Project finance seems to remain very constrained.
Who’s Who Legal: What makes a good local mining counsel?
Philip Christensen: This somewhat depends on what’s meant by ‘mining counsel’. Mining companies have a diaspora of legal needs ranging from M&A, employee relations, occupational health & safety, environmental, mining law, etc. First and foremost, I think that a sound knowledge of the mining industry is essential – from exploration, through production to sale and marketing. The mining industry will always be heavily regulated, so having a good perspective on how emerging regulations might impact companies in the mining sector is very important. I think the ability to properly assess risks, and communicate that to our mining clients, is perhaps the greatest value-add we can have.
Abdón Hernández: You need not only the “know-how” but also the “know-who”. It’s not enough to be fully knowledgeable on the mining regulatory framework – it’s also necessary to have, firstly, practical experience in the local mores, traditions and formats customary in mining legal work; and secondly, good contacts with federal and local government officials involved in the regulation of mining, or those responsible for the “red tape” required in government applications for permitting, etc.
Glenn Faass: For significant mining projects to be financed in a major market or sold to a professional investor, the project needs to be as solid legally as domestic laws permit. This doesn’t require “bullet-proofing”, because investors, bankers and the market know that that’s illusory in emerging markets – and they also know how to assess and evaluate the legal risk. But it does require that the project isn’t “covered with hair” in a way that’s unusual for that jurisdiction. This in turn means that the legal team must have technical legal skills, as well as a knowledge of what’s worked previously. In various emerging markets, including some in the CIS and in Latin America, these skills are widely available from local counsel. In others, much more needs to be supplied by international counsel.