Legal and Contractual Development of Mining Projects

Ecole des Mines de Paris CESECO Country / Mining Companies Relationship & Large Mining Country / Mining Companies Relationship & Large Mining Contracts Contracts How to adapt to a changing world ? How to adapt to a changing world ? March 11th, 2014 Marc Frilet Managing Partner Frilet Soci t 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 The economic, legal and contractual development of mining projects up to the 21 up to the 21st stcentury century The 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 The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury Key provisions of mining codes of the 90 s and a new equilibrium between mining companies, countries and stakeholders century Example: African mining codes 1. Prospection, authorizations and permits: rights and obligations created 2. Research or exploration permits: rights and obligations created Regulatory conditions Contractual conditions Some key issues: land use, expropriation, resettlement 3. 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 The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury century Mining agreement for large and complex projects Example of relationship between code and mining agreement for a large and composite mining project: ilmenite Fort-Dauphin Madagascar (see also article) 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 regulatedby the code The mining companies clarify that they could only be interested in such a massive investment having an important transformationaleffect 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 mining agreement to reach those standards and to negotiate in good faith a comprehensive document submitted for approval to a 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 developmentof the mine to gather with public infrastructures (ports, roads, water and power

The economic, legal and contractual development of mining projects The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury Highlight of issues regulated by the framework agreement century Title 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 developmentof 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 The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury century Stability of the regulations (landscape of our 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 The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury century Tax and custom regime Corporate income taxes o Limit of the rates o Depreciation o Loss carry-forward o Calculation of taxable income o Deductions from taxable income o Value of products Mines Taxes Tax on Income from capital Personal income tax Sale tax Transfer tax Professional tax Taxes payable to local authorities Indirect taxation

The economic, legal and contractual development of mining projects The economic, legal and contractual development of mining projects up to 21 up to 21st stcentury century Custom provisions Final admission: Initial investment period, operation period temporaryadmission Stability of tax and custom regime Accounting principles:annual financial statements, interimreports Financial obligations: financial obligations of the State, financial obligations of the mining company Prerogativeof 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 Indemnificationin case of breach by either parties: Quantum of damage Paymentconditions Currency of payment Event Consequences

A changed situation for country / mining companies relationship at A changed situation for country / mining companies relationship at the dawn of the 21 the dawn of the 21st stcentury century Contrary 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 forward Key findings and way forward The Chatham House report The ICMM Toolkit for Mining partnerships for development Model Mining Agreement Innovative approaches building on lessons learnt in the PPP world

Guiding principles for durable mining agreements in large mining Guiding principles for durable mining agreements in large mining projects projects 1. Recognizing that it is impossible to foresee in advance all feature situations and that a water tight agreement is in most cases counter productive 2. Engage with governmentsand stakeholders:the agreementshould: 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. 3. 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 Guiding principles for durable mining agreements in large mining projects projects 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. 4. 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 Honor 75008 Paris France Tel : + 33 1 56 26 00 40 e-mail : avocats@frilet.com www.gcila.org