Ecole des Mines de Paris – CESECO - PowerPoint Presentation

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Ecole des Mines de Paris – CESECO“Country / Mining Companies Relationship & Large Mining Contracts”How to adapt to a changing world ?March 11th, 2014

Marc Frilet

Managing Partner « Frilet –

Société

d’

Avocats

 »

Chair of the Management Committee of GcilA

Vice-President of the French Institute of International Legal Experts (IFEJI)

Head of the drafting committee CICA PPP-Working Group

Co-promoter of UNECE PPP International Centre of Excellence

The economic, legal and contractual development of mining projects up to the 21st centuryThe search for an equitable approach mutually beneficial The very poor track record of some landmark mining projects

The development of best practices and standards

The development of modern mining codes and innovative mining agreements

The host countries expectations, the investors expectations, the issues

Economic and social development

Fair return on investment

Environment

Community

Taxation

Control of development

Freezing deposits

Asymmetric bargaining power

Development of better governance

The economic, legal and contractual development of mining projects up to 21st centuryKey provisions of mining codes of the 90’s and a new equilibrium between mining companies, countries and stakeholdersExample: African mining codes

Prospection, authorizations and permits: rights and obligations created

Research or exploration permits: rights and obligations created

Regulatory conditions

Contractual conditions

Some key issues: land use, expropriation, resettlement

Exploitation: investment phase and operation phase

Environmental impact studies and related permits

Community relationships

Taxation

Optimization of operation and extraction

Dispute avoidance and dispute resolution

The economic, legal and contractual development of mining projects up to 21st centuryMining agreement for large and complex projectsExample of relationship between code and mining agreement for defining respective rights and obligations in a large and composite mining project:

ilmenite Fort-Dauphin Madagascar

(see also

article ref

Madagascar had a modern mining code at a time as promoted by the IFI’s

The code was very comprehensive for environmental, community issues mining titles

However, many issues essential for major investments with long term recovery were not regulated by the code

The mining

company clarified

that

it

could only be interested in such a massive investment having an important transformational effect if mining laws, procedures and practice were elevated to international standards.

It was agreed that Madagascar could not elevate all the laws and practices to international standards in a short time period.

As a result, it was agreed to develop

a framework

mining agreement to reach those standards and to negotiate in good faith a comprehensive document submitted for approval to

the

national assembly.

If the national assembly approves, the agreement becomes the law of the country which supersedes local regulations to the country.

After numerous exchanges, a framework agreement has been agreed. It became law of Madagascar and permitted the investment and development of the mine to gather with public infrastructures (ports, roads, water and

power)

The economic, legal and contractual development of mining projects up to 21st centuryHighlight of issues regulated by the framework agreementTitle granted to local company with 20% participation of the State

Status of the State participation: right to hold some shares without payment, right to have representatives to the Board and to control information

Main principles of shareholders agreement

Sale of minerals: arm length, good faith, project finance issues, price

Mining permits:

Exploration conditions renewal

Operation, conditions and Terms

Land status: when necessary public domain

Land for port and conditions of construction of a multi user port on the basis of possible PPP contract

Environment: Conditions of development of SEIA and of issuance of authorizations and permits

ownership of project assets

Protection of property, rights, titles and interests

The economic, legal and contractual development of mining projects up to 21st centuryStability of the regulations (landscape or grandfather clause)

Insurance

Investment program

Evaluation phase

Establishment of the legal framework of the project

Preparation of a feasibility report

Condition of investment decision

Project financing

Shareholders capital contribution

Project financing plan

Financing of additional investment

The economic, legal and contractual development of mining projects up to 21st centuryTax and custom regime Corporate income taxesLimit of the rates

Depreciation

Loss carry-forward

Calculation of taxable income

Deductions from taxable income

Value of products

Mining Taxes

Tax on Income from capital

Personal income tax

Sales

tax

Transfer tax

Professional tax

Taxes payable to local authorities

Indirect taxation

The economic, legal and contractual development of mining projects up to 21st centuryCustom provisionsFinal admission: Initial investment period, operation periodtemporary admission

Stability of tax and custom regime

Accounting principles: annual financial statements, interim reports

Financial obligations:

i

)

of the State,

ii)

of

the mining company

Prerogatives

of the State: consequences of breach of the mining agreement, inspection, monitoring of mineral for exports

Force majeure

Early termination

Dispute resolution

Structured conciliation

Arbitration

Applicable laws

Indemnification in case of breach by either parties

:

Events

Quantum of damage

Payment conditions

Currency of payment

A changed situation for country / mining companies relationship at the dawn of the 21st centuryContrary to expectations many landmark projects faced important problems

Between 2001 and 2010 the number of cases submitted to international arbitration increased nearly fourfold

This dramatic increase reflects tensions among stakeholders involved in the sector, culminating in disputes that have been difficult to resolve in a cooperative manner

A simplistic approach may attribute this situation to “resource nationalism”

Quote from an authoritative piece of work: the Chatham House Report conflict and coexistence in extractive industry:

“many analysts fail to distinguish incendiary rhetoric from policies that legitimately address societal concerns”

A new evolving concept for resilience for large and complex mining projects

From “Corporate Social Responsibility” to “Social License to Operate”

Key findings and way forwardUseful ReferencesThe Chatham House Report – November 2013

The ICMM

Tookit

for Mining

Partneships

for Development

– July 2011

Model Mining Agreement

– April 2011

Innovative approaches building on lessons learnt in the PPP world:

Guiding Principles for Durable Mining Agreements in Large Mining Projects

by Marc Frilet & Ken Haddow in “IBA Journal of Energy &Natural Resources Law –

Vol

31 N° 4 – 2013”

Guiding principles for durable mining agreements in large mining projects (abstract of IBA article) Recognizing that it is impossible to foresee in advance all feature situations and that a water tight agreement is in most cases counter productiveEngage with governments and stakeholders: the agreement should:be founded in discussed and mutually agreed objectives of each party;

define an economic balance within which the enterprise will operate and outside of which terms will be adjusted to return the enterprise to the agreed balance; and

in the form of agreement, draw on the scheme of modern public-private-partnership (PPP) agreements.

Main objectives:

create an agreement that minimizes the possibility of disruptive future renegotiations that are costly for all concerned. The goal is an agreement that will be stable and predictable in the long term.

put aside consideration of pure legal mechanics. Instead, the parties should start with a detailed setting down of the mutually agreed objectives of each for the enterprise and for the agreement, based on a joint evaluation and understanding of those

The subsequent detailed mechanics of the agreement will be based on those. The objectives will head the agreement and be an enduring reference in the future conduct and equilibrium of it.

Guiding principles for durable mining agreements in large mining projects (abstract of IBA article) reach an agreed consensus at the outset on the enduring economic and financial parameters for the project, based on an agreed and transparent business case. This ensures that the core objectives and fundamental terms remain satisfied during the life of the enterprise. Practical outcome: from a traditional mining agreement to a collaborative joint-venture (Social License to Operate)

Occasionally in future years, in the face of fundamentally changed external circumstances, detailed terms can be adjusted to reflect the founding objectives of the parties and thus re-establish overall contractual equilibrium in line with the objectives.

Conceptually, the relationship can be reconceptualised from a mining agreement granting rights to the miner, to a collaboration agreement, akin to a collaborative joint venture, in which each party is bringing different things to fulfill mutually agreed and understood objectives.

In return, this triggers concepts that are easy to translate into enforceable clauses or regulations – such as hardship, right to economic equity, special rights of the State when public interest is at stake, special rights of the private investor when sovereign rights are triggered, guarantee of fair and efficient compensation, limitation of speculative profits balanced by various guarantees to make reasonable profit over the life of the venture, simplification of the permitting process, clarification of the tax and customs situation, clear procedures for land use, transparency of the accounts, etc.

Thank You ! Me Marc Frilet

Frilet – Law firm/ GcilA

91, rue du

Faubourg

Saint

Honoré

75008 Paris – France

Tel : + 33 1 56 26 00 40

e-mail : avocats@frilet.com

www.gcila.org