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Overview of Mining Investment Risks. © 2008 Fasken Martineau DuMoulin LLP. All rights reserved. This information is not legal advice and is being provided.

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Presentation on theme: "Overview of Mining Investment Risks. © 2008 Fasken Martineau DuMoulin LLP. All rights reserved. This information is not legal advice and is being provided."— Presentation transcript:

1 Overview of Mining Investment Risks

2 © 2008 Fasken Martineau DuMoulin LLP. All rights reserved. This information is not legal advice and is being provided for information purposes only. Fasken Martineau DuMoulin LLP does not guarantee the completeness of the information contained in this presentation and we are not responsible for any errors or omissions in or your use of, or reliance on the information.

3 Mining Investment Risks in Frontier Countries Mining investment decisions are made after economic and profitability prospects are assessed having weighed potential rewards against possible risks In “Frontier Countries” it may be harder to assess risks and/or rewards Mongolia: Changes in royalty and taxation regimes Congo: Review of mining contracts Ecuador: Review of mining concessions and impose royalties Bolivia: Nationalization of mining assets

4 There are risks related to mining per se Exploration risks Technical Geological Mining and Production risks Geological Operational Financial (e.g., development costs) Economic (e.g., commodity prices) Environmental

5 And there are business-related risks Legal factors Ownership Contractual matters Regulatory regime Fiscal regime Operational factors Political and Social factors Political Nationalization Profit repatriation Falling out of favour Social External factors (NGOs, influence from other states, etc.)

6 JUNIORS MID-SIZED & MAJORS Involved in exploration, production and processing Have deeper technical, managerial, legal and financial resources May have political clout, both in the host country and abroad Focus on exploration Often are pioneers in new areas Likely to have limited technical, managerial, legal and financial capabilities Generally lack political leverage Size of enterprise may be relevant to risk profile

7 Much can be learned before investing Political, social, economic and fiscal stability Respect for the rule of law and effective legal profession/judiciary Security of tenure over mining titles and right to alienate or pledge them Government’s capability and effectiveness, at all relevant levels Attitude towards foreign investment Labour and procurement issues (locally and from abroad) Ability to repatriate profits and capital Ability to sell output in local and foreign markets

8 Is (or was there) an active mining sector? Are there any local or foreign mining exploration or producing mining companies? Are the local mining authorities competent? Title registries Permitting issues Are there adequate local capabilities? Technical and production personnel Administrative, legal and financial expertise Mining contractors Is there adequate infrastructure and power?

9 Many other (often free) resources available Embassies and commercial attaches International financial institutions (World Bank, IFC, IDB, EBRD, Asian Development Bank, African Development Bank) Political risk insurers (EDC, OPIC) Trade associations Publicly filed documents (EDGAR, SEDAR) Open source rankings Transparency International Fraser Institute Google (surprising what you may find there!)

10 Legislative checklist Mining statutes (Clear and transparent mining registry. Can titles be pledged or assigned? Do mineral rights trump surface rights? Interaction with other natural resource statutes (e.g., forestry or oil and gas) Foreign investment laws (Investor protection clauses? Stability agreements? Is the country a signatory to bilateral investment protection treaties (BITs)? Currency flows and convertibility issues) Real estate (Can foreigners acquire land and freely dispose/pledge their holdings? Development restrictions?) Corporate law (Can foreigners set-up and control companies? Local directorships?) Securities laws (Is there an effective regulator? Stock market involved in mining sector?) Taxation law (Stable and fair tax system? Relevant bilateral tax agreements? Centralized system?) Import and export statutes and regulations (Approval and duties. Relevant free trade/customs union?)

11 Legislative checklist (cont.) Competition law (Are mergers allowed? Would market power be an issue?) Environmental laws (What standards apply (national or international)? Permitting process? Enforcement and penalties?) Dispute resolution (Is there an independent judiciary? Effective and independent local bar? Is the country party to international dispute resolution mechanisms?) Regulatory system (Is there an industry regulator? Is there a fair administrative law process? Are there effective avenues for redress against adverse regulatory decisions?) Employment law (Is the law restrictive or liberal? Preferential provisions for nationals?) Aboriginal/First Nations laws (Clarity re land tenure? Has there been litigation in this sector? Are there any tensions with native groups?) Energy and Transportation laws (Relevant if production is contemplated)

12 Investment protection mechanisms Membership evidences intent by host country to receive foreign investment Provide dispute resolution and settlement mechanisms Convention on the Settlement of Investment Disputes (ICSID) (1965) ICSID Convention and Arbitration Rules Other arbitration rules may be used (UNCITRAL, ICC, etc.) Bilateral Investment Protection Treaties (BITs) Purpose is to reduce non-economic risk Provide protection against arbitrary expropriation or dispossession Measures taken must not be discriminatory and there must be effective compensation Over 2000 BITs in place and while similar, they may be important differences Multilateral Investment Guarantee Agency (MIGA) (1988) Risks related to currency transfer, expropriation, war and civil disturbance and breach of contract by host government may be covered Premiums may be higher than those of other political risk insurance agencies (such as EDC) but MIGA guarantees extend to longer periods

13 Investment protection mechanisms (cont.) Agreements with governments Stabilization agreements (primarily cover taxation matters) Ad hoc agreements for large projects (particularly if other infrastructure projects are required in connection with a mining project) Joint-ventures with host governments (central, regional, municipal or state-owned entity (e.g., Crown corporation) Agreements with local and strategic partners Local parties bring specialized knowledge and other inputs Strategic partners may have political clout

14 Investment protection mechanisms (Cont.) Mine development enhances both risks and protections Risk because mines are not mobile Rules may change once investment has been made Protection is enhanced because the project financing process seeks to mitigate risk with contractual and other provisions Off-take agreements may involve several jurisdictions providing added political clout (e.g., Japan, Canada and Germany in the Antamina project) Participation by strategic investors (e.g., IFC)

15 Risk management is a dynamic process Even modern governance/legal systems cannot be taken for granted Australia (1976) Fraser Island case: –Mining operations in full compliance with State of Queensland mining and environmental laws. All production was for export. –Local community concerned about damage to fragile environment. –Federal government withheld export permits (exports fell under federal jurisdiction). –Court held this was not expropriation and Federal government ultimately offered compensation to investors Canada (2007) Ontario (Diamond royalties) Alberta (Oil sands royalties) Even “tough” jurisdictions have (some) bearable spots i.e. not all you read in the papers is correct

16 Probity is essential Be on guard against becoming involved, directly or indirectly, with corruption or other illegal matters such as: Tax evasion or illegal currency transactions Breaches of environmental laws Breaches of labour laws Corporate and Personal Liability Civil and criminal exposure Litigation possible in home jurisdiction or where company is registered or is a reporting issuer Insurance policies are likely to exclude willful wrongdoing Important to set and monitor high ethical and business standards within firm and subsidiaries, and demand similar standards from joint-venture partners and contractors Consequences can be severe and long-lasting Reputational loss The internet is unforgiving (It will be on Google for a long time) Negative media exposure may lead to regulatory attention and shareholder lawsuits Alcoa Faces Allegation By Bahrain Of Bribery (front page, Wall Street Journal, February 28, 2008)

17 Thank You! Raziel Zisman Counsel Global Mining and Energy Groups Fasken Martineau DuMoulin LLP 66 Wellington Street West Suite 4200, Toronto Dominion Bank Tower Toronto, Ontario Canada, M5K 1N6 Tel (direct): (416) 868-3548 Fax: (416) 364-7813

18 Fasken Martineau’s Global Mining Group Fasken Martineau has over 150 years of experience in the mining industry in Canada and internationally Winner of the Who’s Who Legal’s mining law firm of the year award in 2005, 2006 and 2007 Fasken Martineau has offices across Canada, in Toronto, Vancouver, Montreal, Quebec and Calgary, and internationally in London and Johannesburg Fasken Martineau has approximately 650 lawyers of whom 75 are involved in mining law and related disciplines

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