In international mining projects, the threat of action by national governments is a spectre that looms constantly over foreign operations. With gold and silver prices setting new records almost daily, the competition for mineral reserves among mining companies has become intense. In this climate of competition, governments of mineral-rich countries are under pressure to accelerate the pace of their recovery from the economic crisis. As such, they are more likely to utilize a multitude of tactics to profit from increased revenues from projects on their soil. These could range from specific fiscal measures to denial of permits or environmental approvals and could also include changes in the law affecting mineral rights. The recent refusal of the Columbian government to grant Greystar Resources (“Greystar”) the necessary environmental approvals required for its Angostura gold-silver project brings this to mind. The government justified its decision based on the project’s proximity to a nearby city and the possibility of the contamination of its water supply. These sorts of actions can stall if not halt international projects entirely, most especially greenfield projects whose sponsors and financing needs are highly sensitive to such adverse events.

Most standard mining contracts do not generally account for these forms of government action. The possibility of adverse government intervention in mining projects is often simply viewed as an inherent risk in the venture. However, this possibility should be contemplated in the planning and drafting of international mining contracts by building in mechanisms which strongly incentivize the foreign government’s support for the project in a changing market climate by linking concessions to international prices.

From this perspective, a goal for negotiating and drafting contracts should be to avoid a total loss scenario in which government action results in the loss by the company of the entirety or near entirety of its investment in the project. If one accepts the likelihood of government intervention increasing with the profits of the company, then a key consideration at the planning stage should be a robust and comprehensive arrangement which links the economic destinies of the company with that of the local and national governments as well as the community where the project is based.

Integrated approach

For some, this may border on tautology, but this approach can be easily forgotten in times when international prices offer immense returns. Companies should take such spikes in prices and profits as an indication that they should turn their attention to managing their relationships with the foreign government. Given the costs of bringing agreements to local or international courts and the damage to the long-term relationship between the company and the government, the inclusion of mechanisms and considerations in the contract which address the potential for government action adverse to the project’s interests through concessions linked the changing international prices can be the most prudent and economically efficient course of action.

A key distinction between a drafting approach which does not contemplate a comprehensive concession regime for the foreign government and one that does is that a potential renegotiation following an increase in international prices is less likely when a strong concession regime is in place. A foreign government will have a more difficult time justifying a renegotiation of their agreement with the company when concessions are already present and tied to changing international prices. They will also be less likely to impose tactical countermeasures.

Simandou ore deposits

The possibility always exists that a foreign government will push companies to the point that their demands make the project untenable regardless of the existing concessions. In the fall of 2010, both the U.K. and Australia warned Guinea that its continued threats to strip Rio Tinto (“Rio”) of its claims to the Simandou ore deposits would endanger its image among investors and lead the international community to question its commitment to due process and the rule of law. In 2008, Guinea’s military-backed government revoked two of Rio’s four blocks of the Simandou concession on the grounds that Rio was taking too long to develop them. Most recently, the government set a deadline for Rio to comply with a request to submit details of its progress on the remaining Simandou blocks and renounce its claims to the previous two blocks under threat of losing a third block. Rio has already put over $800 million into the Simandou project. This example highlights the fact that companies need to have an integrated approach to dispute resolution that contemplates managing their relations in the host country as carefully as they do the legal protections in their agreement.

Whether contained in the agreement or manifested in less formal ways, this relationship management will yield strong benefits. As much as some government action can appear to be fatal to international mining projects, the fact remains that governments do not make decisions in a vacuum. The recent announcement of the Panamanian government to repeal Law 8 of their mineral resources code which would limit foreign ownership of mining projects within its borders has emphasized that it will to honour existing concessions or contracts with international mining companies. Most noteworthy is Inmet Mining Corporation’s presence in the country which is protected by Contract-Law 9 enacted by the National Assembly of Panama specifically to govern Inmet’s Cobre Panama development. While mining companies with international operations should employ a full range of measures to indicate their commitment to the interests of the foreign government, this is most strongly evinced in a concession arrangement which shares the returns of positive changes in international prices.

The content of this article is intended to provide general information to the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance. For specific applications of the principles set out herein to a particular set of circumstances, the reader should seek professional.

Sam Carsley practices in the areas of corporate and securities law with McLean & Kerr LLP, a law firm based in Toronto.