The International Who’s Who of Mining Lawyers has brought together three of the world’s leading practitioners to discuss the expropriation of natural resources by governments, the financial climate and its impact on junior companies, geographical expansion and the responsibility of mining companies to engage stakeholders.
Expropriation of natural resources assets by certain governments around the world has been high-profile news over the past year. How has this affected your practice? Have you seen an increase in dispute resolution in these jurisdictions? Are there fears that the expropriation trend might continue and affect clients’ mining assets?
Jay Kellerman: Our clients are not immune from this, whether it is the threat of outright expropriation, additional so-called “super taxes” or additional royalties. That said, during the last half of the year, we have been hearing less and less of this, lowering with the falling tides of the industry generally. If anything, long-term it will make “safer” jurisdictions much more appealing.
Elisabeth Eljuri: Without a doubt the resurgence of resource nationalism around the world has increased the amount of international arbitrations being either filed or considered. Clients have also become more savvy in structuring their investments early on to ensure the maximum protection possible.
In the specific case of Venezuela, the gold mining industry was in fact nationalised over the past year and that of course led to certain filings, in great haste due to Venezuela’s departure from ICSID. The departure was effective on 24 July 2012 and any company that did not file at least a letter at that point may now most likely be unable to file unless the treaty that protects it allows for alternatives for arbitration outside of the ICSID arena. Our firm has become very active in the area of arbitration in Latin America over the past decade and we do not necessarily expect that to slow down.
Michael Rattagan: Following the taking of Aguas Argentinas, a public utility providing drinking water and sewage services, and Aerolíneas Argentinas, the air carrier, the Argentine government this year carried out the expropriation of a majority interest in YPF held by Spanish Repsol. While every country has the right to expropriate an asset under specific circumstances, this usually entails providing for a fair compensation and paying it before taking actual possession. In this sense, the Argentine government was not too orderly about it: first it took possession of the reins of the company and only later declared the asset (or, rather, the objective of “energy self-sufficiency”) a matter of public interest. Most importantly, the government has yet to assess a fair value and pay it to Repsol. It was suggested the government’s move is to push this figure as close to zero as possible, alleging that Repsol left YPF “highly indebted” and “presumably filled with environmental liabilities which severity has still to be determined”. That is not sending a good message to the outside world. The first thing the Argentine government did after this taking was to tour the world looking for new YPF shareholders, industry-related investors, strategic partners seeking badly needed capital (particularly to develop its share oil and gas reserves): it went to the US, then to China, then Russia. Until this open matter with Repsol is resolved (the Spanish will be taking Argentina to ICSID arbitration under the BIT) it is unclear whether any investment commitments can reasonably be expected. Potential investors are concerned with the set of restrictions impacting Argentine companies generally, and saying, “We’d like to have market – not political prices for the oil and gas we produce. We’d like to have access to the foreign exchange market to buy US dollars, and we’d like to be able to send dividends to our parent company. And please hurry up and settle your dispute with Repsol, otherwise how can I convince my Board that you will not mistreat me in the same manner in the future?”
While one may feel sympathetic that a country should have an oil company to channel public energy policies, like Petrobras, Pemex and many others, I do not agree with the method, with the manner of the taking. As lawyers we must stand for the rule of law, and fight and point out at governmental excesses, and this was clearly one. We live in an integrated world, and industries and markets operate with a real time flow of information, every government decision that is perceived as a sudden change of rules has a consequence in the mood of investors.
In spite of the above, I do not think that the YPF case is the first of many nationalisations to come. Many in government may wish that the state adopts a still greater role in the economy, not merely as a regulator but as a driving force. Many countries have this model. In Argentina state ownership of companies has systematically failed. A demagogic management of state-owned companies has always led to corruption, inefficiency, black holes and poor services
The Kirchner administration has been proactive and supportive of mining as an engine for development in various provinces. Attacking mining companies would be a total and serious contradiction with its own policies. In addition, the extraction of minerals (most of them exported) is not perceived as a politically sensitive activity as is the production and supply of hydrocarbons.
It also helps that mining in Argentina is essentially a provincial affair: tampering with the right of the provinces to sustain these activities (and thus impacting their royalty and tax-related revenue) would create additional strain between provinces and the central government (the nationalisation of YPF’s controlling shares meant a serious loss of provincial prerogatives, and the passing of the national law for the protection of glaciers also created tensions).
Last but not least, it is unlikely that the government will step in and take control of projects that are in exploration phase: even if it wanted, it does not have the monetary means to do so. And in respect of projects that are already in operation, the central government realises that they have become a source of additional revenue: in recent years it has imposed a tax on mineral exports.
On the provincial level, what we have seen in recent years is a drive towards higher royalties (a trend in which Argentina does not stand alone, the so-called “windfall taxes” having made their appearance in Australia, Chile, Peru and South Africa). We have also seen a number of “infrastructure investment packages” which provinces negotiate with each mining operator, and even anticipated payment of royalties in projects that are still not in operation – governments can have immediate needs and short-term views! In some cases, a province will demand that a state-owned company becomes a minority shareholder in the project in exchange for the concession, but not making capital contributions. But generally speaking, and particularly in those provinces that are openly and clearly “pro-mining”, the industry is seen as a force for growth, employment generation and tax revenue.
In the current financial climate, both debt financing and equity financing are hard to access. Our research noted that junior companies are struggling to fund their projects. Have you noticed this trend in your jurisdiction? What efforts have been made to help junior companies access financing? Has there been any consolidation among this section of the industry? Have you seen an increase in the number of joint venture agreements?
Elisabeth Eljuri: Our firm’s mining teams have noticed the trend, although this issue is not exclusive to the mining industry. Some of the efforts made by our clients have included steaming and forward purchase agreements for producing and near-producing projects, and royalty sales.
On the one hand, due to capital expenditures restrictions, many of the majors have been disposing of assets and the juniors have been trying to pick those up which entail interesting opportunities that otherwise would not have been available to those junior companies. Also, there are consolidation examples such as the Endeavour purchase of Avion.
In terms of joint ventures, we have seen more Asian/Indian groups which are looking to secure supply in the natural resources area in general (not only mining) and they attempt to do so by entering into joint ventures. Economic considerations sometimes appear less important when compared to the need to secure supply for strategic reasons.
Jay Kellerman: The current market has been as bad as it has ever been in the resource sector. There is little financing available and companies are running out of cash. Some companies are simply not able to make it, and there have been, and will be, more insolvencies. There are of course buying opportunities, but there has never been as much M&A in this sector as there should be, and it will not change this time. Alternative financing structures are being more actively considered including off-takes, streaming transactions and investments at the asset level. It is hard to predict when this drought will be over.
Michael Rattagan: Most junior companies that operate in Argentina are foreign companies that obtained financing abroad, either through bond issues or listing shares. A number of local companies or groups are also active, in these cases I understand they have resorted to self-financing. There is no relevant support from local banks or governmental agencies in Argentina.
Securing the support of local communities is increasingly important to a mining project’s success. Mining companies are becoming the providers of water, electricity, health and education, as well as ensuring mine safety and environmental impacts are controlled. What impact are these issues having on your clients? Are you being asked to advice on social and environmental issues more frequently?
Elisabeth Eljuri: Environmental considerations and community issues arecertainly adding costs, particularly project development costs. It is also slowing down the development schedules, due to lengthy discussions/negotiations with the local communities. The calendar on those negotiations is not entirely controlled by the companies. A solid strategy at the company level is required to ensure that these issues are properly resolved.
As part of this process, clients are establishing corporate social responsibility (CSR) mandates. In general, environmental concerns have been addressed for many years. However, the other issues are relatively new and evolving. Project lenders want these issues to be addressed as well and this creates pressure on the sponsors to address them in advance and to the lender’s satisfaction. We are now seeing more consultations on the environmental issues as well.
Jay Kellerman: Our clients are becoming quite focused and more and more sophisticated when dealing with CSR. The question that we see is really not “if” but rather “how”. It is all in the implementation and every project and every country is different. Given that and the diversity of the global operations of our clients, we are not as much involved in this directly as compared to in-country management.
Michael Rattagan: Building roads, schools, hospitals, providing water and other initiatives are becoming a given for companies looking into operating a mine in Argentina – ie, more and more often they become part of their infrastructure or mining development budget. In addition to being generators of direct and indirect employment and having a multiplying effect on the local economies, these companies are often more compliant with the payment of taxes and social security contributions than other, pre-existing industries. This, and competition for human resources, can be a source of tension.
Engaging in constructive dialogue with the communities near a mining project and devoting resources to the improvement in their living conditions is not always enough. Mining companies must adopt serious and effective communication strategies, ie, not only what they do but how they present it to the local community and even to provincial and national media is crucial.
It is also true that, usually, the expectations of the communities are very high – sometimes disproportionate and unfair on the mining operator. This is particularly so in remote areas in which the central and the local governments are virtually absent, and the community turns to “the company” to address present and past lacking in basic infrastructure and services.
The pressure to preserve the environment is a global phenomenon which mining cannot and should not be spared from. The cliché that “mining companies are here to take away the gold and leave misery and desolation behind” should be responsibly addressed and abandoned. While it is true that a certain degree of scepticism in rural or poor areas on the effective control of the environmental agencies (usually understaffed and ill-equipped), it is also fair to say that most international mining companies, local and foreign, usually follow standards and procedures which are stricter than the applicable laws. Moreover, since most of them are publicly traded, they simply cannot afford an environmental incident because the price of their shares will drop dramatically. Also worth mentioning are the severe penalties applicable to managers and directors. It is important that all players adopt reasonable positions. I am respectful of environmental awareness work and pressure campaigns conducted by certain NGOs, but I have also seen cases of abuse and opportunistic use. It is important that all players adopt reasonable positions in which the end result is a “win-win”. A mining project that is unreasonably blocked may prevent hundreds and even thousands of families from a better living, and make them vulnerable to political manipulation through “chronic” unemployment subsidies or a paycheque as a civil servant (often for dubious services or no services at all) at the end of each month.
In Argentina, the concern for the environment has been reflected in stringent legislation at the federal, provincial and municipal levels. Overlapping and inconsistencies occur from time to time. The National Congress recently passed a law for the protection of glaciers which some of the so called “mining provinces” resented because it contains vague or imprecise clauses and definitions that virtually prohibit mining activities in the Andean chain. The reach of the national law and the interaction of each jurisdiction are currently under the analysis of the courts.
Mining companies are scouring the world for resources and have expanded their operations into central Africa and Asia. Have you experienced any new jurisdictions in your work this year? As a law firm, how do you cater for your clients’ ventures into these more remote regions?
Michael Rattagan: I have not seen any new jurisdiction in particular arriving in Argentina this year. As everybody knows, Argentina is pretty much a newcomer to the word of mining – an industry the Argentine government successfully launched in the 1990s through a number of laws promoting it, and offering tax stability and certain tax benefits. Companies active in Argentina, both in projects already in operation as well as in exploratory efforts, come from Canada, the US, Australia, South Africa, Peru, Japan and Brazil. China has so far had a pretty timid incursion in Argentine mining and is not a relevant player.
Elisabeth Eljuri: As a global firm, we are in many jurisdictions that are sometimes out of reach and require sophisticated advice. We absolutely seek to cater to our clients needs when it comes to new jurisdictions and we continue to add new offices every year. We are adding two offices in Africa in 2012 alone. As to jurisdictions generally, members of our mining team have gone to a number of new countries in Africa as well as Central Asia, for example.
Our strategy is twofold: we either deliver directly from our office in such location, if we have one, or we deliver the work with a specialist team from an office which deals the most with such jurisdiction. In certain places in Africa, the work may be led from, for instance, South Africa, Paris or London. We would then rely on local counsel to provide the local law support we need, but the client sees significant value in the global firm leading the work – especially due to our industry expertise, which is sometimes not available in such remote locations. We manage the local counsel work to ensure deliverability, timeliness, quality and compliance with client’s ethical and anticorruption standards.
Jay Kellerman: At Stikeman Elliott, we would follow a similar approach to that discussed by Elisabeth. We are not, as a firm, as global in reach with “on the ground” offices, but we similarly partner with the best local lawyers in the market.
I would also note that, given the state of the world, both economic and political, we have seen a marked increase in the activity level of our clients being “closer to home” – North America. This is the first time in a long time that we have seen this. Whether this is a blip or the beginning of a trend is yet to be seen.