Mining 2017: Trends

As commodity prices struggle to recover, the mining industry remains flat. With fewer financings and new projects, lawyers have seen the bulk of their work come from restructurings of existing projects. But new avenues are opening up for those who are willing to take risks – there is a consensus opinion within the legal community that there are plenty of options available to grease the wheels in an atmosphere of low growth. Law firms and mining companies alike are looking to pursue new routes that mean they don’t have to wait for the markets to pick up before they can make headway once again.

The state of the market

It has been a mixed year for commodity prices. In April the S&P GSCI total return rose by 10.1 per cent, with 20 of 24 commodities seeing a rise. Yet according to the World Bank, metals and minerals – the mining industry’s most crucial commodities – fell by 1.6 per cent on the whole in September 2016. In April the Bloomberg Commodity total return index rallied 8.5 per cent, the highest monthly rise since December 2010.

With the commodities market still slow, mining operations are diminishing and law firms are seeing more of their work fall under the heading of restructurings. Perhaps the most significant was FTSE 100-listed Anglo American’s restructuring, where it jettisoned 60 per cent of its assets and reduced its workforce by 6,500. Lawyers we spoke to say that M&A has also formed a much greater part of their work, since funding for new projects is harder to come by and acquiring or merging with competitors looks an increasingly effective way to increase market share and resources.

The outlook for full-service firms with arms in mining, energy and natural resources is better, however, as they can draw on other sources of revenue; established mining practices such as those of Gowling WLG, Fasken Martineau and ENSafrica will see no significant difficulty in weathering the storm. Nevertheless, although dedicated mining practices may not have the luxury of robust complementary M&A and banking expertise, they continue to hold the enviable advantage of providing a truly in-depth service when it comes to operation and on-the-ground issues.

Undoubtedly, though, prolonged low commodity prices have affected all parties in the market. As one partner at an international law firm commented: “Both mining companies and law firms have had to reinvent.”

Alternative financing

Part of this reinvention has been the rise in alternative financing. In the wake of the reluctance of the banking sector to fund new projects, mining companies have looked for new routes that may provide the necessary financing. Streaming transactions, whereby corporations make an upfront payment in exchange for the right to buy a fixed percentage of future production in a mining enterprise, have been particularly popular. Anglo Pacific Group CEO John Theobald has been a strong advocate of alternative financing for smaller and mid-tier projects, and Glencore announced in February that a long-term streaming agreement had been made by its subsidiary Narila Investments with Franco-Nevada Corporation, including an advance payment by Franco-Nevada of US$500 million.

However, while some banks are exiting the market, private equity remains robust, with natural resources investment funds having put aside US$6.9 billion to invest in metals and mining this year, according to Preqin.

New Frontiers

Geopolitics continues to play its part in reshaping of the mining industry and mining lawyers are closely watching to see which markets will be opened to increased global trade as a result of political reforms. Myanmar is of particular note: following the 2015 amendments of the Myanmar Mines Law of 1994, permits have been extended to 50 years for large projects; joint ventures between local and foreign firms are now allowed; and regulation has increased, including the introduction of tighter penalties for mining offences including potential prison sentences for some offenders.

Lawyers we spoke to about the considerations involved in setting up in new and often less well-regulated jurisdictions stressed the importance of local links, particularly with the country’s national mining commission. Forging these links early and quickly is crucial for prolonged and productive business in the country. This means that as these new frontiers open up, the influx of mining firms and law firms over a short period of time may be significant.

Even in more established or heavily regulated jurisdictions there are still new opportunities upon which firms can capitalise. In the UK, Banks Mining has secured initial approval to establish an opencast coal mine on the coast of Northumberland, while a £2.4 billion potash mine built by AIM-listed Sirius Minerals in the North York Moors has been greenlit and will begin operation in 2021. The latter’s success in securing Stage 1 funding, as well as lining up backers from some of the world’s most preeminent investment banks – including JP Morgan, Lloyds Bank, Société Générale, RBS, Export Development Canada and ING – for its second funding round demonstrates that there is still appetite from major financial institutions to fund mining projects that can put forward a compelling argument for returns.

While Canada, Australia, and Central and South America remain the most robust jurisdictions for mining, there is clearly plenty of scope worldwide for new mining projects on which firms with strong established practices and local links can capitalise.

Environmental Issues

Both new ventures and old will continue to contend with increasingly regulated environmental laws, and will therefore be in need of a legal presence that can advise on such matters. Following the signing of the Paris Agreement at the Paris climate conference (COP21) by 195 countries in December 2015, there was concern among investors that demand for fossil fuels could be badly hit. However, some of the world’s largest mining companies wasted no time in assessing how the new international agreement would factor into its future strategy. BHP Billiton, which is in favour of introducing carbon pricing, has suggested that its copper mining industry will in fact be the biggest beneficiary, as copper is used in wind turbines, solar panels and electric vehicles. For this reason, law firms will need to liaise with their environmental law teams all the more or develop mining departments with in-built renewables expertise. Moreover, pure mining practices or corporate practices that have a mining portfolio without environmental and due diligence specialists may find themselves with gaps in their expertise that need to be plugged if they want to be retained or see new work.

A future game-changer?

Finally, sources told us that technology is set to make a huge impact on the mining industry. McKinsey Global Institute has identified 12 “disruptive technologies” that could have a potential economic impact of between $14 trillion and $33 trillion a year in 2025. Alongside advanced robotics and energy storage, mobile technology is posited to be a technology that could have a major effect on various industries. In mining, it could potentially revolutionise safety and further automation. For law firms, this may mean ever-closer collaboration between their mining and technology in the coming years.

Conclusion

Although the outlook of some lawyers we interviewed was distinctly gloomy, many of those we spoke to were overwhelmingly cautious rather than pessimistic about the current state and future potential of the market Some suggested that the current commodities cycle is almost over, meaning the possibility of prices rising in the near future. One lawyer whom we spoke to at a firm with an international mining practice was quite certain that the worst of the current cycle is over and commodities will soon rise again – not least because gold prices are on the up, a good indicator of other more volatile commodities for the near future. Mine owners and law firms may have one eye on potential better times in the future, but they appreciate that plenty of business can still be done in the market as it stands. 

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