Mining Practice Guides Mining

v Mining Practice Guides Mining

Editor Michael Bourassa

Reproduced with permission from Law Business Research Ltd This article was first published in January 2019 For further information please contact [email protected]

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First published 2018 First edition

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i © Law Business Research 2019 Contents

Introduction �� 1 Michael Bourassa

1 P roject Financing in the Mining Sector ��11 Andrés Nieto Sánchez de Tagle

2 Streaming Agreements ��20 Rafael Vergara and Maximiliano Urrutia

3 Legacy Issues in M&A Transactions ��30 Jorge Alberto Ledesma García and Jorge Ruiz

4 Selected Commercial Mining Agreements �� 40 Carlos Vilhena and Adriano Drummond C Trindade

5 B attery Minerals – A View on Lithium Brine Projects in Latin America ��49 Florencia Heredia and Juan M Allende

6 T ax Stability in the Mining Industry ��66 Juan Pablo Menna and Agustina de Abaroa

7 A High Price to Pay – An Overview of Anti-Corruption Law in Canada ��78 Frank Mariage and Youcef Belrachid

8 Community Engagement �� 90 Sebastián Donoso and Francisca Vergara

9 S ocial Licence and the Rule of Law ��109 Luis E Lucero

10 Mining Closure ��117 Adolfo Durañona and Tomás Eduardo Trusso Krause Mayol

11 Argentina, Mining and Glacier Protection ��127 Sergio D Arbeleche and Sebastián P Vedoya

12 The Legal Nature of Mining Rights in Ecuador �� 142 César Zumárraga and Juan Fernando Larrea Savinovich

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13 Sanctions and the Mining Industry ��153 Andrei Liakhov and Mykola Lytvynenko

14 G lobal Mining Resource Disclosure �� 168 Brian E Abraham

About the Authors ��183 Contributing Law Firms’ Contact Details �� 195

iv © Law Business Research 2019 Introduction

Michael J Bourassa1

This is the first edition of Practice Guide – Mining published by Getting the Deal Through, a division of Law Business Research. It is my pleasure to serve as editor and to have assisted in recommending authors who were prepared to contribute an assortment of chapters. The final product addresses various legal themes that are topical to the international mining industry, and are written from diverse jurisdictional viewpoints. The authors are from the following countries: Argentina, Brazil, Canada, Chile, Ecuador, Mexico and Ukraine. For the most past, the contributors have been active with the International Bar Association or the Rocky Mountain Mineral Law Foundation, or both. In this introduction I will provide a summary of each of the chapters. Prior to doing so, I thought the chart would be interesting to readers of this edition. It is a summary of the biggest mining mergers to be seen in recent history, as reported by Mining Technology on 2 October 2018.2

1 Michael J Bourassa is a partner at Fasken Martineau DuMoulin LLP. 2 ‘Hot Prospects: the biggest mining mergers to rock the industry’ by Talal Husseini, 2 October 2018, https://www.mining-technology.com/features/biggest-mining-mergers/.

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Value (US$ Merging Completion New entity Commentary billions) parties date 272.96 Shenhua 20 November China Two of China’s largest state-owned Group 2017 Energy enterprises became the world’s largest and China Investment organisation in the coal mining, thermal Guodian Corporation power, renewable energy and coal- Corporation to-liquid conversion industries. (A workforce of 326,000 staff – four times that of the entire US coal-fired power industry in 2016.) 90 Glencore and 2 May 2013 Glencore The merger created one of the world’s Xstrata largest natural resources conglomerates (and the world’s largest mining company, with an annual revenue of US$205.5 billion) with a workforce of 190,000 people across 50 nations, and a portfolio of 90 commodities, including copper, barley, oil and vanadium. 38.1 Rio Tinto July 2007 Rio Tinto Rio Tinto Alcan was the world’s largest and Alcan Alcan producer of aluminium and bauxite at the time (currently, China Hongqiao Group is the world’s largest aluminium producer, producing 7.5 million tonnes of aluminium; Rio Tinto Alcan produces 3.6 million tonnes. 18 Barrick Incomplete ‘New’ This merger will create the world’s Gold and (announced Barrick biggest gold mining company, with a Randgold 24 September combined production capacity of 6.6 Resources 2018) million ounces of gold per year. 13.3 CVRD and 2006 Vale (name Vale is now the second-largest nickel Inco change mining company worldwide, with annual 2010) nickel production of 260 kilotonnes (Norilsk Nickel produces 285 kilotonnes nickel per year). 8.8 Caterpillar June 2011 Caterpillar The merger was to position Caterpillar and Bucyrus to offer a broad range of surface and International underground mining products and solutions to its customers. 8.72 BHP and 2001 BHP Billiton As part of a rebranding campaign, BHP Billiton (became dropped Billiton from its name and BHP in ran an advertising campaign called 2017) ‘Think Big’, which addressed global supply chain issues and sustainability, and focused initially on steel (crucial for growing cities) and electric vehicles (requiring four times more copper than conventional cars). 8.5 Alpha 2011 Alpha The merger created the second-largest Natural Natural US coal mining company by market Resources Resources value. ANR holds 2,110 mines and total and Massey (ANR) coal reserves of 5 billion tons, with a goal Energy to become the largest US supplier of metallurgical coal for the world’s steel industry, and a highly diversified supplier of thermal coal to electric utilities in the United States and overseas.

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What follows is a summary of each of the chapters contained in this book.

Project Financing in the Mining Sector This comprises a summary of common regulatory framework issues and general considerations in Mexico, as well as corporate structures typically used and usual forms of securities for project financing. The Mexican Constitution provides that natural resources are the heritage of the nation, and the federal government sets out the conditions for exploiting these resources. Project financing is not governed by one specific law, and there are rules and laws applicable to mining activities. An analysis is presented of the various laws applicable to mining such as the Mining Law itself, official standards, foreign investment, the Commercial Code, the law of credit transactions and negotiable instruments, and others. Regarding conflict of laws, project agreements can be made by whatever law the parties agree to, and foreign law is binding and enforceable in Mexican courts provided it is not contrary to Mexican public policy. A summary of federal government agencies involved in the Mexican mining sector is also provided. Project financing corporate structures will depend on several factors, with the most common being the incorporation of a new entity – either a stock corporation or the equivalent to a limited liability company – as a special purpose vehicle for the project. Securitisation can be any contractual tool that secures a debt (the most used forms are the security trust and the non-possessory pledge), which allows lenders to create a security interest on all types of property (security interests created over a mining concession must be registered with the Mining Public Registry). Security trusts and non-possessory pledges are governed by various laws, which are summarised in this chapter.

Streaming Agreements This piece addresses the relevance that streaming agreements have gained as a financing alternative for mining projects, and discusses how these agreements are structured as well as the benefits and risks that may result for the streaming company or investor, and the mining company. An overview and history of streaming arrangements is provided, starting in 2004 when Wheaton River shareholders decided they were not getting value for its by-product silver production, and incorporated Silver Wheaton Corp to maximise revenues from such by-product. Following a statement that there is no standard form to be used for each streaming transaction, the chapter then describes in detail the way certain provisions are drafted and what distinguishes them from other agreements (royalties and off-takes). Provisions such as purchase price and deposit (paid in advance), streamed metal, representations and warranties, security packages (with emphasis on requirements in civil code countries), covenants, buy-back and other rights for the operator, dispute resolution (typically by arbitration), tax matters, and general matters such as confidentiality and change of control provisions are described in detail.

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Legacy Issues in M&A Transactions Legacy liability (also known as successor liability) in M&A transactions greatly differs between civil and common law countries. This piece is an analysis of issues from the former perspective with particular emphasis on the Mexican legal system. The authors provide an overview of the different structures to carry out an M&A transaction, and analyse the general implications of such structures under a legacy liability standpoint; flag the areas that typically involve legacy liability issues in the mining sector; and discuss some strategies and tools to minimise legacy liability risks. Although asset transactions provide less successor liability risk than share deals, it is noted that asset deals may be more difficult to achieve in Mexico because of transfer formalities applicable to certain assets, such as real estate and intellectual property. Share acquisitions are easier to achieve since the target company assets do not need to be listed, and a detailed purchase price allocation of the acquired assets is not required.

Selected Commercial Mining Agreements This chapter addresses some key agreements in the mining industry, focusing on how they can affect mining ventures at an international level, as well as summarising the current trends, opportunities, challenges and risks within the industry. It provides an overview of joint venture, option, royalty and streaming agreements, ending with a discussion of different approaches to mining agreements, perspectives of juniors and majors, and civil law versus common law concerns. Transactions in the mining sector are often cross-border – mining companies and sources of capital come from common law countries like the United States, Canada or the United Kingdom, whereas the mineral properties may be located in civil law jurisdictions. This may present more challenges than expected from a legal standpoint, and the implications of local legislation and the civil law system need to be taken into account. One cannot simply draft an agreement from a foreign law template and then state that the agreement is governed by local law and subject to the jurisdiction of local courts. It must be recognised that the enforcement of rights and obligations will likely take place in the hosting country. As the authors conclude, ‘Having concepts of foreign law interpreted and enforced in the hosting country can be challenging and in some cases even ruled invalid, especially if the legal systems are different.’

Battery Minerals – A View on Lithium Brine Projects in Latin America This section provides a current overview of market trends and legal aspects related to battery minerals and the evolution of the electric vehicle industry in a constantly changing environment. A detailed explanation is offered on lithium-ion batteries and the various cathode compositions that use differing combinations of raw materials (lithium, graphite, cobalt and nickel). Energy storage systems are being revolutionised, with the biggest demand coming from electric vehicles. With an increase of global electric car sales from less than 2 per cent currently to 28 per cent of all new car sales by 2030, there is uncertainty that the lithium market will be able to meet the demand. Production from brine from salars in the ‘lithium triangle’ – Argentina (9.8 million tonnes in resources; 2 million tonnes in reserves), Chile

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(8.4 million tonnes in resources; 7.5 million tonnes in reserves) and Bolivia (two major lithium reserves) – could become stressed as these salars hold extremely fragile and dynamic ecosystems, and there is a need to determine and understand the origins of the waters that feed them. These systems in the Andean region are very complex, and studies have yet to be undertaken to understand the implication of brine extraction. Authors provide an analysis of community engagement issues regarding lithium projects as well as a discussion of cobalt production and pricing issues.

Tax Stability in the Mining Industry This is an analysis of tax stability in Argentina, as well as other jurisdictions in the region. Since the enactment of the Mining Investments Law No. 24,196, in 2017, mining activity in Argentina has grown, becoming one of the major industries in the export sector and attracting important investment and infrastructure projects for the country. Some of the benefits of the Mining Investments Law are discussed, such as a total tax burden stability for 30 years after the filing of a feasibility study, and special income tax deductions for amounts invested in prospecting, exploration, and other work intended to determine the technical and economic feasibility of mining projects. The authors provide an excellent summary of a court challenge made by mining company Cerro Vanguardia regarding an equalisation tax imposed in addition to corporate tax. The Supreme Court concluded that the application of the equalisation tax increased the total tax burden of the company and was therefore contrary to the stabilisation regime obtained by the taxpayer. Finally, a comparison with the laws in Chile and Peru is provided, concluding that the guarantee of tax stability is an essential tool to protect mining investments from regulatory changes that could occur during the life of a mining project. In Argentina, the tax stability guarantee is stipulated by law, whereas in Chile and Peru the investor must enter into an agreement with the state in order to benefit from the tax stability.

A High Price to Pay – An Overview of Anti-Corruption Law in Canada This section offers an overview of the Canadian legal framework with regard to corruption and anti-bribery, which are codified in the Corruption of Foreign Public Officials Act (CFPOA) – which came into force on 14 February 1999 – and the Criminal Code. Major amendments to the CFPOA occurred in June 2013, which codified its primary offence – bribing a foreign public official. The authors identify the nature and scope of the offences (with high-level comparisons to the US Foreign Corrupt Practices Act and the UK Bribery Act), explore in detail recent Canadian case law (to demonstrate the severity and seriousness with which courts have addressed the issue of bribery and corruption), and include a selection of best practices regarding international commercial dealings and corporate governance. Recent cases have resulted in substantial fines and prison terms: Niko Resources – C$8.26 million; Griffiths Energy – C$10.35 million; and Karigar – three years’ imprisonment. The chapter concludes with recommendations for compliance programmes that involve the following elements: (i) management support and resources; (ii) written standards and controls; (iii) monitoring, auditing and evaluation protocols; (iv) enforcement measures; (v) continuous review; and (vi) whistle-blower procedures that are described in detail.

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Community Engagement This piece presents a discussion of ISO 26000 – the international standard developed to help organisations effectively assess and address those social responsibilities that are relevant and significant to their mission and vision, operations and processes, customers, employees, communities and other stakeholders, and environmental impact. Community engagement is a particular type of dialogue that falls within the social responsibility of an organisation, and the authors discuss the particular requirements of ISO 26000 in this regard. Principles of social responsibility with respect to community engagement to be followed by an organisation include accountability, transparency, ethical behaviour, respect for stakeholder interests, respect for the rule of law, respect for international norms of behaviour and respect for human rights. Commercial mining ventures face an increasingly complex and challenging framework of international regulations that touch upon different aspects of their activities. There is also focus on international instruments that ‘(i) provide general norms and principles of behaviour that are not mining sector specific but fundamental to comprehend the responsibility of an organisation in the context of community engagement, and (ii) regulate general or specific aspects of community engagement, whether they are mining sector specific or generic to all commercial ventures’ (such as United Nations principles and others).

Social Licence and the Rule of Law This is a discussion on the interaction between social licence and the rule of law, and draws upon an article written by Jim Cooney, ‘Reflections on the 20th anniversary of the term “social licence”’, 20 years after he first coined the expression ‘social licence’. In March 1997, Mr Cooney was vice president of International Government Affairs with Placer Dome Inc, and he used the term during a World Bank gathering held in Washington, DC. In a recent article he expressed surprise about the evolution of his original concept. A brief description of Argentine history is presented to give some factual background to the constitution of 1853. The expression ‘social licence’ has gained a predominant role in the mining industry. As stated in the chapter ‘it is fair to say that the current, global and expanded notion is that social licence is an essential condition, something that a project simply can’t afford not to have.’ In fact, in some ways it is stronger and far more important than any legal requirement relating to a mining facility. In that regard, this chapter addresses in good part the conflict and uncertainty between the rule of law and social licence.

Mining Closure Starting with a summary of mining’s economic contribution to various countries, an argument is made that the greater the impact mining has on the GDP, the greater the dedication should be of each country to deal with mine closure. A failed mine closure is discouraging for a country and its citizens, and will lead to less motivation to support mining development.

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The authors focus on the main challenges that arise in connection with closure, and recommend the most effective solutions and good practice principles (such as in Canada and Australia where mine closure plans must be part of the mining project from the very beginning). The chapter discusses successful processes such as adequate legal regimes that stress not only environmental but also socio-economic elements; continuous state monitoring; companies’ obligations to report and update their closure plans; the existence of financial guarantees to assure closure costs are covered; and full transparency and publicity regarding companies’ closure processes and plans. Under the section ‘Legal regimes: Challenges and solutions’ the authors identify the main challenges in Argentina, Chile, Canada and Australia, followed by a discussion and comparison of financial assurances. Laws must be established to protect a country and its community from closures, and particularly from abandonments or unforeseen closures upon which, most often, the company that is facing closure costs does not have available funding. In that regard, each country deals with the issue differently; where Argentina has weak requirements, with annual funds to be fixed in the companies’ discretion, Chile requires an instrument that guarantees the value of implementing closure, and Canada and Australia go one step further by proposing that cost analysis for guarantees needs to be based on a transparent and verifiable planning of tasks to be carried out for closing and post-closing activities. Finally, for mining operations and closure to succeed it is recommended that mining plans be public, with communities having the right to give their opinions. Mining remediation costs and guarantee amounts should also be public, and reviewed and updated periodically.

Argentina, Mining and Glacier Protection This chapter provides a thorough analysis of the National Glacial Law approved by the Argentine National Congress in October 2010, specifically regulating the minimum environmental protection standards for the preservation of glacial and periglacial zones. The Law is not without controversy and continues to be subject to interpretation and disputes between mining companies and environmentalists. The Law created an inventory of glaciers, which provides information necessary for their protection, control and monitoring. The Law sets out types of prohibited activities in a glacial environment, including ‘mining and hydrocarbon exploration and exploitation’. All activities that are not prohibited are subject to an environmental impact assessment process. Some actions have been brought by environmentalists and anti-mining non- government organisations in an attempt to suspend mining operations, which are waiting to be decided by the National Supreme Court, and several mining companies challenged the constitutionality of the Law. Charges have even been brought against certain former government officials for failing to properly create the glacier inventory. The discussion on the Law continues to be influenced by political interests, with the outcome of persons being unjustifiably indicted and legal uncertainty being maintained.

The Legal Nature of Mining Rights in Ecuador In Ecuador, the state owns all minerals and non-renewable natural resources within the national territory, but can delegate the development of such resources to individuals or entities by granting mining concessions for a term of 25 years. Ecuador is similar to Chile

7 © Law Business Research 2019 Introduction and Peru regarding the richness of its resources (especially with attractive gold, silver and copper deposits), however much of the country is still unexplored. In the opinion of the authors, the main reason is ‘erred public policy’ for minerals and the absence of legal security, owing to legislation influenced by the oil industry. Mining concessions are awarded by public tender, unlike other Andean countries. An explanation is presented of the civil law concepts of real versus personal rights and how they differ from a common law system. In the Ecuadorian system, complications arise as to whether the enforcement of certain rights (such as illegal mining issues, agreements with third parties, pledges) lie with the state or the concessionaire. Recommended amendments to the legislation are provided to clarify these issues – specifically to eliminate the public tender process and phases in the concession process that are inconsistent with the timing of a mining project. On a positive note, the Mining Ministry was created in 2015 and there have been various initiatives in the right direction: the signing of the Fruta del Norte exploitation contract with Lundin, the mining cadastre opening, and the construction of Mirador and Río Blanco projects resulting in the return of some major mining companies.

Sanctions and the Mining Industry This is an overview of the history of the mining industry and the different types of sanctions. New sanctions are being introduced frequently and it is often difficult to determine the reasons behind them. At the time of writing, the United States imposed about 19 sanctions programmes, and the European Union implemented and amended about 95 sanctions and restrictive measures since the start of 2018. The chapter discusses the difference between measures restricting trade (protecting domestic markets by imposing restrictions or tariffs, or both, on certain goods) and sanctions proper (political measures aimed at facilitating political change or forcing compliance with international agreements). The authors focus more on ‘sanctions proper’ – particularly on those that may affect mining. Natural resources are often located in countries affected by an assortment of sanctions. Companies need to have an understanding of the various sorts in order to achieve their business goals. In worst-case scenarios, it could lead to major financial and reputational losses, and personal liability for directors and officers. Sanctions compliance policies are recommended and should include risk assessments, screening and monitoring of counterparties, analysis and reporting of potential sanctions-related circumstances, and ensuring compliance by counterparties. In doing so, a sanctions compliance group should keep an inventory of sanctions, watch lists and politically exposed persons relating to affected areas, which are put into effect by international institutions and major countries. This chapter provides some useful tips on implementing tracking policies and compliance mechanisms.

Global Mining Resources Disclosure The guide concludes with an excellent overview of mineral resource and reserve disclosure standards, starting with the Poseidon scandal in Australia and the establishment of the Joint Ore Reserve Committee (JORC) in 1971. The JORC Code played an important

8 © Law Business Research 2019 Introduction role in the development of standard definitions for codes and guidelines, including the concept of a competent person. Developments in Australia were later followed by the Bre-X fiasco in Canada and the establishment of National Instrument 43-101 in 2000 (and the similar concept of a qualified person). Today’s disclosure rules began to see some uniformity following the establishment in 1994 of the Committee for Mineral Reserves International Reporting Standards (CRIRSCO). It comprises organisations from around the world with mining as its focus. Much of the current disclosure in the industry is pres- ently derived from CRIRSCO standard definitions and has been adopted in Australasia, Brazil, Canada, Chile, Colombia, Europe, Indonesia, Kazakhstan, Mongolia, Russia, South Africa, Turkey and the United States. The author concludes by saying that the world of mining disclosure is gradually converging because of the efforts of CRIRSCO and the national mining associations, and the application of regulators and stock exchanges throughout the world of similar disclosure standards.

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Project Financing in the Mining Sector

Andrés Nieto Sánchez de Tagle1

This chapter will cover the following: • common regulatory framework issues and general considerations; • corporate structures typically used; and • usual forms of securities.

Common regulatory framework issues and general considerations Article 27 of the Constitution of Mexico states that resources are the heritage of the nation and, therefore, it is the federal government that sets the conditions for these resources to be exploited. In general terms, this applies to a great majority of Latin American countries. However, project financing in general is not governed by one specific law – it depends on the type of project and lenders. In other words, the legal framework depends on the project’s nature. In the mining sector, in order to finance and execute a project, rules and laws applicable to mining activities must be observed. The current rules and laws applicable to mining activities in Mexico are as follows: • the Constitution of Mexico; • the Mining Law; • the Mexican Official Standards; • the Commerce Code; • the Foreign Investment Law; • the General Law of Commercial Companies; • the Law of Credit Transactions and Negotiable Instruments; • the Law on Public-Private Partnerships;

1 Andrés Nieto Sánchez de Tagle is a partner at Von Wobeser y Sierra, SC.

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• the Expropriation Law; • the Agrarian Law; • the General Law on Ecological Balance and Environmental Protection; and • other state and municipal laws and regulations that govern, among other things, zoning, the environment and water.

The Mining Law The Mining Law regulates the exploration and exploitation of minerals in Mexican territory. In order to engage in such activities in Mexican territory, it is essential to obtain a concession from the Ministry of Economy, which is the highest authority in the mining sector. A concession granted by the Ministry of Economy will last for a period of 50 years from its inscription in the Mining Public Registry, and can be renewed for the same period if the concession is not cancelled for any reason. The Mining Law states that exploration and exploitation activities in the mining sector can only be performed by individuals with Mexican nationality, communal landhold- ings and entities duly incorporated under Mexican laws that have their legal address in Mexico, and that include in their corporate purpose the exploration and exploitation of minerals. In regard to Mexican entities with foreign investment, rules found in the Foreign Investment Law must be observed. Depending on the activity, limits on foreign investment may apply. This is something that also applies, in general terms, in other countries in the region. The process for obtaining a concession depends on its type. Some common elements of all of them include paying a fee to be considered a bidder (if there is a public process), or to get title over private land. Once the concession is secured, certain rights must be acquired, such as being able to perform activities of exploration and exploitation at the mining site; dispose of the mineral products obtained; and obtain the expropriation, temporary occupation or easement over lands in order to perform activities of exploration and exploitation, etc. The concession holder also has some obligations, including the following: • executing the mining activities under the Mining Law; • paying for the mining rights; • complying with the Mexican regulation2 regarding safety in mines and environmental protection; • periodically providing, to the Ministry of Economy, technical and accounting reports; • reporting to the Ministry of Energy the discovery of any hydrocarbons; • paying mining duties during the life of the concession (failing to pay can result in the cancellation of the mining concession); and • paying an annual mining royalty equivalent to 7.5 per cent of the income derived from the mining exploitation activities after permitted deductions, etc.

2 Mexican Official Standards :NOM-120-SEMARNAT-2011; NOM-023-STPS-2012; NOM-141-SEMARNAT-2003.

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Holders of gold, silver or platinum concessions must pay an extraordinary annual mining royalty equivalent to half of all revenues resulting from the sales of minerals. Depending on the concession specifics and type, there might be other royalties or charges to be paid, such as to the Geological Service, which is a federal government agency in charge of conducting research and identifying the potential mineral resources of the country. This royalty or charge is determined by the Ministry of Economy. Finally, when exploring the option of investing in or executing a mining business, consider that most countries restrict or tax certain exports, requiring additional permits or authorisations, or both, that must be approved by the government. In the particular case of Mexico, the Ministry of Environment and Natural Resources is the competent authority to issue such permits and authorisations for the export of minerals and natural resources. It is important to consider some additional requirements prior to the execution of any project, such as registration before the Mining Public Registry. In Mexico, in order to obtain a mining concession, the following steps must be taken: • company’s registration before the Ministry of Health; • confirmation with the corresponding Mining Department that the land area or field of interest is free. If it is free, submit the concession request to the proper mining agency in the corresponding state (ie, the General Mining Agency in Mexico City); • if all the requirements are met, the mining agency will record in the request that it was accepted for review and processing, and will issue the certificate to the applicant. Validity runs for 60 working days, so a mining expert can make an assessment of the land lot; • if requirements are complied with and satisfied, the Mining Department will issue an opinion on the mining lot assessment report, which should be completed within 20 working days of the date of its submission; • the Mining Department will issue a concession proposal, and will forward the proposal to the Mines General Directorate to continue with the application process; • the Mines General Directorate, through the Department of Cartography and Mining Concessions, will cartographically validate the concession proposal and verify that the lot is free for concession, and will issue a recommendation within the next 15 working days granting the mining concession previously validated by the Ministry of Energy; and • if all conditions and requirements set forth in the Mining Law and its regulations are satisfied, the Ministry of Economy will grant the concession.

The Mexican Official Standards The Mexican Official Standards set forth technical rules regarding mining activities that must be observed in order to structure and execute a project in the mining industry.

The Commerce Code The Commerce Code regulates all commercial acts and agreements. In order to execute a finance or security agreement for a project finance transaction in Mexico, the rules of the Commerce Code must be observed.

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The Foreign Investment Law The Foreign Investment Law regulates the participation of foreign investors in Mexican entities. In regard to the mining sector, foreign investors can acquire up to 100 per cent of the shares of the Mexican entities with mining concessions, as long as they agree with the Ministry of Foreign Affairs to be treated as Mexican citizens in respect of their equity participation in the concession holder.

The General Law of Commercial Companies The General Law of Commercial Companies governs corporations and limited liability companies. If any these entities are used as corporate vehicles for financing a project, the rules set forth under this law must be observed.

The Law of Credit Transactions and Negotiable Instruments Securitisation instruments used for project financing must comply with the Law of Credit Transactions and Negotiable Instruments.

Law on Public-Private Partnerships Under the Law on Public-Private Partnerships, a project finance transaction in the mining sector can be structured with the participation of the federal government and the private sector as partners in the planning of the transaction. Public-private partnerships (PPP) are used to develop projects where a federal agency sponsors the relevant project, or federal funds contributed by the government are used for the project. It is common practice for PPPs in mining or infrastructure projects to take advantage of project finance schemes for the purpose of optimising available resources, as well as efficiency, capacity and time considerations, among others. PPP schemes can be used to conduct infrastructure projects in any areas of the Mexican economy where the private sector is free to participate, either directly or through a concession or authorisation, where rendering public services or using government property is involved (as occurs in the mining sector).

The Expropriation Law Under the Mining Law, a concession holder for the exploration and exploitation of minerals can request from the Ministry of Economy the expropriation of private property in order to perform such activities. The expropriation procedure and its rules are governed by the Expropriation Law.

The Agrarian Law One of the essential matters regarding an infrastructure project in the mining sector is the ownership of the land where the project will be executed. In some cases, the land owned may be an ejido, a piece of land comparable to common land, assigned mainly to be conjointly used by the ejido members for agricultural and livestock production. In these cases, in order to execute a project on common land, the provisions of the Agrarian Law must be observed and complied with since the Agrarian Law regulates such land.

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The General Law on Ecological Balance and Environmental Protection For the exploration and exploitation of minerals in Mexican territory, it is necessary to obtain an authorisation, based on an environmental impact assessment, from the Ministry of Environment and Natural Resources in regard to the environmental impact that such activities could generate. The environmental impact assessment will determine the terms and conditions that the Ministry of Environment and Natural Resources will impose on the mining works and activities in order to prevent or minimise the negative effects on the environment. The rules and procedure for such authorisation, and the environmental impact assessment, are regulated by the General Law on Ecological Balance and Environmental Protection.

Other state or municipal laws and regulations that govern zoning, the environment and water There are some municipal laws and regulations3 that govern certain issues in an infrastructure project, such as the granting of permits, licences, concessions and authorisations required for the construction and operation of the project. Such laws and regulations will vary depending on the geographical location where the project will be developed.

Applicable law In case of conflicting laws, Mexican law has adopted the principle that any agreed foreign law is binding and enforceable in Mexican courts provided it is not contrary to Mexican public policy or was wilfully chosen to defraud Mexican public policy. Therefore, project and financial agreements may be governed by whichever law the parties agree upon regardless of the Mexican conflict-of-laws rule. There is no need for a relationship between the chosen applicable law and the parties, or the subject matter of the contract. Nonetheless, the parties of project agreements for infrastructure development generally choose to be governed by Mexican law owing to the regulatory and local issues surrounding the contracts, and the interference foreign law could have with the permits and concessions. Project agreements related to a federal government procurement process are governed by Mexican federal laws. This situation does not represent a conflict in the international lending community. However, real estate property rights must be governed by the law applicable to the location where the property is located, according to the Mexican conflict-of-laws rule. Therefore, the governing law for real estate property rights, including security interests, may not be chosen and will always be Mexican federal or local law.

Federal government agencies involved in the Mexican mining sector Ministry of Finance and Public Credit The Ministry of Finance and Public Credit’s mission is to propose, manage and control the economic policy of the federal government’s financing, taxation, spending, income

3 For example, building regulations for the municipality of Hermosillo; Federal District Law of Urban Development; and Federal District Law of Environmental and Land Protection.

15 © Law Business Research 2019 Project Financing in the Mining Sector and public debt, in order to consolidate an economy that is equitable, inclusive and sustainable, and thereby strengthen the wellbeing of Mexicans. In regard to the mining sector, the Ministry of Finance and Public Credit is in charge of collecting and receiving the compulsory payment of mining duties.

Ministry of Economy The Ministry of Economy is responsible for improving the productivity and competitiveness of the Mexican economy – through innovative policies in the industrial, commercial and service sectors, as well as through the support of entrepreneurs and businesses of the social and private sectors – based on regulatory improvement, market competition and diversification of foreign trade, for the wellbeing of consumers. It grants concessions for the exploration and exploitation of mining resources in Mexican territory. Through the Mining Undersecretary, it supervises and coordinates the mining activities and the enforcement of the Mining Law, as well as the coordination of the Geological Service and the Mining Development Trust.4

Ministry of Agricultural, Territorial and Urban Development The Ministry of Agricultural, Territorial and Urban Development is an institution of the Federal Public Administration whose purpose is to plan, coordinate, manage, build and run public territorial management policies; ensure decent housing, and urban and rural development; and provide legal certainty to agricultural centres. It is in charge of the Committees for Regional Development for Mining Areas. Since, under the current regulatory framework in Mexico, a mining concession does not confer any right to its holder on the surface land area, in order to carry out its exploration or exploitation, the National Agrarian Registry, the Agrarian Agency and the National Trust Fund for Ejido Development – which belongs to this Ministry – must participate in the process of authorisations when common land is involved.

Ministry of Environment and Natural Resources The Ministry of Environment and Natural Resources is responsible for promoting the protection, conservation and restoration of the ecosystems and natural resources of Mexico, including environmental goods and services in order to promote their sustainable use. It is also entitled to grant authorisations and permits regarding issues such as environmental impact and change of land use on forest land, managing of mining waste, as well as reporting and controlling air emissions and wastewater discharges into national waters and resources.

Ministry of Energy The Ministry of Energy aims to establish and lead the country’s energy policy (within the constitutional framework) monitor compliance with an emphasis on energy security

4 The Mining Development Trust is a public trust that promotes the development of the mining industry in the country, providing technical assistance and financing services in order to create and boost mining projects.

16 © Law Business Research 2019 Project Financing in the Mining Sector diversification, and ensure a competitive, high-quality, economically viable and environmentally sustainable energy supply that the development of national life requires. There are some cases where activities of exploration and exploitation of minerals can coexist with the exploration and extraction of oil and other hydrocarbons. In such cases, the Ministry of Energy together with the Ministry of Economy may draw up rules so that such mining activities can coexist. Since the Ministry of Energy authorises activities regarding the exploration and extraction of oil and other hydrocarbons, in the event that activities regarding minerals and oil coexist, the Ministry of Energy must be involved.

Ministry of National Defence The General Directorate of the Federal Register of Firearms and Explosives Control is an agency of the Federal Public Administration under the Ministry of National Defence. Its mission is to regulate the activities under the Federal Law on Firearms and Explosives and its regulations on the control and monitoring of industrial and commercial activities and operations carried out with weapons, munitions, explosives, devices and chemicals. Various general, ordinary and extraordinary permits are processed before the General Directorate of the Federal Register of Firearms and Explosives Control for the use and handling of explosives in the mining industry in the area of purchase, storage and use of explosive material.

Corporate structures typically used The corporate structure typically used in project finance regarding the mining sector depends on several factors – for example, the complexity of the project, level of investment required (need for equity) and the players involved. The most common structure used in Mexico for project finance in the mining sector is through the incorporation of a new corporate entity – either a stock corporation or the equivalent to a limited liability company – as a special purpose vehicle for the project. Limited liability companies are used more frequently since they provide certain benefits in terms of corporate governance and tax matters (especially for US developers, as they qualify as flow-through vehicles under US ‘check-the-box’ rules). Since the legal amendments in 2014, stock companies have become more flexible in terms of their structure, and may establish certain requirements for the transfer of shares, and economic and voting rights, among other matters. The corporate scheme for a project finance transaction may also be structured as a subholding company, which may have other operating subsidiaries, and may include a personnel service company solely in charge of staffing services. As an alternative to the traditional limited-recourse project finance deals, there are schemes that are less burdensome to the developers. Additionally, a wide range of securities, including project bonds (by private and government investments), participation certificates issued by real estate trusts (similar to real estate investment trusts), development capital certificates issued by trusts that finance more than one project and private equity funds used to hold participation in the companies developing projects, are also being implemented. In order to establish a mining company in Mexico, the following steps must be taken:

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• authorisation by the Ministry of Economy of the company’s business name; • authentication of articles of incorporation of the company before a notary public (the corporate purpose must include the exploration and exploitation of minerals); • registration before the Registry of Foreign Investment, if there are foreign shareholders; • registration of the company before the Ministry of Finance and Public Credit, as well as before the Ministry of Health and municipal administrators of the sanitary licence and health control cards; • processing of an environmental impact assessment before the Ministry of Environment and Natural Resources or municipal authorities, or both, for any exploration and exploitation activities; • filing orf a permit for the use of explosives before the Ministry of National Defence; and • filing orf a permit for the water usage before the National Water Commission.

If the above steps are followed and all permits are granted, the mining company will be established and ready to participate in a public bid for a mining concession.

Usual forms of securities Securitisation comprises any contractual tool that secures a debt service. There are no restrictions on securing all kinds of assets, but it is most prevalent in the following: • real estate; • movable property; • financial instruments such( as shares and debt securities); • contractual rights; • claims and receivables; • cash deposits; and • tangible assets (ships, machinery, etc).

In Mexico, the most used securitisation forms are the security trust and the non- possessory pledge. Under the scheme of a security trust, a settlor transfers title to a series of assets and rights to a trustee, which is usually a Mexican banking institution, since under Mexican law only specific entities can act as trustees. Such trustee will hold title of the assets and rights transferred, as there are outstanding obligations under the financing arrangements. The settlor may retain a beneficial interest to use and profit from the estate of the trust in the ordinary course of business, as long as no defaults occur. If a case of default arises, the trustee is contractually authorised to foreclose on the trust estate through tailor-made foreclosure procedures established in the trust indenture, including out-of-court foreclosure (subject to certain due process requirements). Security trusts over contractual rights require notice to all counterparties about the transfer of rights to the trust. Security trusts involving personal property generally need to be in writing and registered with the Sole Registry of Personal Property Guarantees to be fully enforceable and obtain priority with respect to other security interests.

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The biggest advantage of the security trust in Mexico is that the beneficiary can request that the trustee proceed to the sale of the assets without judicial intervention. Obviously, all the contractual obligations in the trust agreement must be fulfilled. Another important advantage is that the assets held in the trust are not considered part of the debtor’s estate in the event of bankruptcy. This is because the law stipulates that the settlor transfers the assets and rights thereto to the security trust, which effectively separates them from the rest of settlor’s assets (there are some exceptions to avoid fraud, of course). The non-possessory pledge allows lenders to create a security interest on all types of property, including machinery and equipment, inventory, bank accounts, receivables, contractual rights, rights under permits and authorisations, and any other intangibles. In addition to security trusts, a security interest over a sponsor’s equity in the project company can be secured through an equity interest pledge agreement. Subject to customary limitations, security arrangements created as non-possessory pledges – as happens with security trusts – typically allow debtors to maintain the posses- sion, use and even the disposal of the secured property in the ordinary course of business. Security agreements must be formalised before a Mexican notary public, or notary for commercial matters, and recorded in the relevant public registry, in order to be valid and enforceable against third parties. Non-possessory pledge agreements and security trust agreements must be registered in the Sole Registry of Personal Property Guarantees to be valid and enforceable against third parties. In addition, security trusts that hold real estate property as part of the trust’s estate, must also be registered before the Public Registry of Property of the state in which the real estate property is located. In regard to the mining sector, for information purposes only, non-possessory pledges created over rights under a mining concession must be registered before the Mining Public Registry. Registration fees and notarial fees are the main costs associated with the effectiveness and perfection of security documents, and they vary from state to state. Notarial fees are subject to maximum levels established by state governments; however, notaries are normally allowed to grant discounts, which are often obtained for large transactions. Likewise, some local laws allow for discounts on the applicable registration fees when the transaction is related to a project that proves to be beneficial for the relevant state (eg, infrastructure in the mining sector). Security trusts and non-possessory pledges in Mexico are governed by the General Law of Negotiable Instruments and Credit Transactions. However, depending on the parties involved, there are a number of other laws applicable to security trusts such as the Credit Institutions Law, the Securities Market Law and, in cases where one of the parties in the transaction is from another country, the Foreign Investment Law.

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Streaming Agreements

Rafael Vergara and Maximiliano Urrutia1

This chapter will refer to the relevance that streaming agreements have gained over the past few years as a financing alternative for mining projects regardless of their stage of development (greenfield projects, projects in current operation, future expansions and even for business rescue), as opposed to traditional funding mechanisms such as equity and debt financing. It will address how these agreements are usually structured and the benefits, opportunities, advantages or risks they entail for the streaming company or investor, and the mining company.

Background Over the past decade, a persistent volatility of commodity prices, rising production costs and the risk-averse nature of formal financing institutions, have caused mining companies to encounter certain difficulties and higher costs when searching for financing through traditional equity and debt funding, leading them to seek alternative mechanisms outside of the formal finance market and customary project finance structures. Streaming agreements have become one such alternative, giving place to a whole new industry that has gained a relevant role in the global market in terms of players, number of transactions, volume of minerals and financial values involved in them. In 2004, the shareholders of Wheaton River Minerals Ltd realised that the company was not receiving the same value for its by-product silver production than primary producers were receiving, so they incorporated Silver Wheaton Corp as an independent company to maximise revenues from such by-product,2 by means of a business model

1 Rafael Vergara is a partner and Maximiliano Urrutia is an associate at Carey. 2 Kari MacKay and Mark T Bennet, ‘Under the Rocks Are the Words: How a Metal Purchase Agreement Revolutionized Alternative Financing and Launched the New Majors – A Look Back at the First

20 © Law Business Research 2019 Streaming Agreements that derived in part from royalty agreements, which then were the primary object of complex transactions in the mining industry. In general terms, royalty agreements entail an upfront payment or contribution from the royalty holder – normally, the holder of an interest in a mining property or a mining company – to a mining company or operator, in exchange for a long-term right to receive a fixed percentage of the proceeds from the sale of specific minerals produced from the mining property affected with the royalty, after certain allowable deductions. Conversely, streaming agreements are essentially metal purchase and sale agreements, in which the streaming company (the Buyer) pays in advance the purchase price to the mining company (the Operator), either as an upfront payment or by a series of instalments, in exchange for the right to acquire a specified amount or percentage of the production of a specified refined metal, with long-term (over 20 years) or even life-of- mine duration.3 Among other features, streaming agreements allow for enough flexibility to accommodate both parties’ interests so that risks are more or less equally allocated, unlike other types of agreements and financing mechanisms. In addition, as explained below, streaming agreements are non-participatory in the mining operation and non-dilutive to the Operator’s shareholders, as opposed to equity financing; therefore, they constitute an attractive source of funding particularly for exploration and junior mining companies. However, medium-sized and major companies have also entered into these types of agreements to diversify their investment and credit portfolios. Streaming agreements are relatively new to the mining industry, which means there is no standard form or model; they can be tailored to each transaction to account for each party’s interests and expectations. They have, however, certain features that distinguish them from other agreements – for example, royalties and off-takes – such as the form of delivery of the funds and the object of the agreement, both of which will be addressed immediately below. Other provisions, which are relatively common to bilateral agreements related to financing, such as confidentiality, dispute resolution mechanisms and governing law, will be addressed further below.

Purchase price, consideration and deposit In streaming agreements, the consideration to be paid or purchase price for the streamed metal is paid in advance by the Buyer; therefore, in practice, such advanced payment is treated as a deposit, which can be structured as a full upfront payment, or as a series of instalments that depend upon the accomplishment of predetermined sequential milestones, or a combination of both. Depending on the stage of development of the mining project, these milestones can refer to the completion of pre-feasibility or feasibility studies, obtaining operation permits and licences, the beginning or completion of construction, and commencement of commercial operations.

Decade of Metal Streaming Transactions’, Proceedings of 60th Annual Rocky Mountain Mineral Law Institute 16-1 (2014). 3 Alan H Monk, ‘Understanding Streaming Agreements and Royalty Agreements: Alternatives to Traditional Financing’, Rocky Mountain Mineral Law Foundation Journal (Vol. 51, No. 1, 2014 at p. 1).

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Usually, the Operator will not be compelled to allocate the deposit to cover specific expenditures but will use it as appropriate. Accordingly, mining companies have resorted to these agreements for construction works, expansion of current operations and even to obtain funds for the repayment of outstanding debt with formal lenders. In addition to the deposit, the Buyer will be required to pay a fixed price that is usually set below the market price for the streamed metal (as quoted, for instance, by the London Bullion Market Association or other commercial exchange, agreed on by the parties), but in an amount that is sufficient to cover the operation costs of the Operator. If the fixed price is lower than the market price at the time of payment, the difference is credited against the deposit until it is reduced to zero. From then onwards, the Buyer will be required to pay the Operator the lesser of the fixed price or the market price; although in more complex transactions, the parties could also include provisions regarding infla- tion adjustments to the fixed price. Under certain circumstances, such as non-compliance with production targets, insol- vency or other events of default, the Operator will be required to repay the uncredited amount of the deposit back to the Buyer. If such repayment obligation is not structured properly, the streaming agreement may be qualified as a non-traditional debt instrument for credit rating purposes. In this regard, the relevant rating entity may take into account, for instance, whether the repayment of the deposit includes payment of interest accrued over the uncredited amount of the deposit, or whether the securities granted by the Operator in favour of the Buyer have preference over those granted in favour of other lenders and creditors.4

Streamed metal As explained above, the idea of streaming agreements resulted from the concept that mining companies were not receiving enough value – or any value at all – for non-core products. Therefore, in virtually all of these agreements, the streamed metal is a by-product obtained from an Operator’s base metal mining project (ie, gold or silver obtained from copper processing). Aside from adding value to an otherwise non-valued or underval- ued asset, streaming agreements over by-products allow the Operator to combine these transactions with other types of financing for their primary metal exploitation without affecting their borrowing capacity. The Operator’s obligation to sell and deliver streamed metal may be fulfilled either in kind – that is, by delivering actual concentrates of the streamed metal to the Buyer – or by way of credits to be purchased by the Operator on metals markets and transferred to the Buyer’s metal account. Naturally, the selection of one of these forms of payment will depend on whether the Buyer is a manufacturer interested in acquiring actual concentrates or a metals trader. From the Operator’s side, however, it might be preferable to agree on a credit-based payment system, so that the Operator can sell the concentrates of streamed metal to a third party (an off-taker, for instance). If the parties agree on an in kind payment obligation, they will normally also agree on whether the streamed metal can be obtained from specific or combined mining projects

4 https://www.reuters.com/article/mining-streaming/dealtalk-big-miners-may-balk-on-streaming -as-sp-changes-tack-idUSL1N0I529X20131024. Last reviewed on 11 September 2018.

22 © Law Business Research 2019 Streaming Agreements of the Operator, provided, however, that in the latter case the minimum referential qual- ities and quantities are met. Commingling may be also tolerated by the Buyer, to the extent that the Operator adopts all necessary measures to ensure traceability on amount, minimum quality and grade of the streamed metal.

Representations and warranties In streaming agreements, both parties grant the usual representations and warranties of any bilateral agreement in relation to their validity and good standing under their respective jurisdictions of incorporation; their legal capacity and necessary prior corporate approvals to enter into the agreement and to be bound by its terms; and the absence of conflict among the rights and obligations of each party under the agreement with pre-existing agreements entered into with third parties, the by-laws of each company and the applicable laws. Additionally, in streaming agreements it is especially relevant that the Operator represents and warrants to the Buyer the rightful and exclusive title to the streamed metal; the lack of encumbrances and other rights in favour of third parties; and the legal ability to exploit, produce and sell the streamed metal with preferential and exclusive rights. This includes complying with all the relevant environmental, health and safety, and other applicable regulations, as well as having all the necessary legal permits to exploit and produce the streamed metal for the duration of the agreement, which in turn includes the absence of judicial conflicts with the surrounding communities (known as ‘social licence’ to operate a mining project). Notwithstanding the above, before entering into a streaming agreement the Buyer will normally conduct thorough due diligence on the Operator’s core assets and permits to confirm the Operator’s legal ability to perform its obligations under the agreement and, ultimately, deliver the streamed metal. The material findings derived from such due diligence will determine the scope of the representations and warranties that the Operator will be required to provide in the agreement, to the extent that, for instance, there are pre-existing rights over the mining property or the streamed metal, or both, in favour of third parties, or that the mining concessions from which the streamed metal will be exploited are affected with grounds for termination or annulment under the applicable law, or have definite duration and, therefore, need to be renewed for as long as the agreement is in force. Even though these matters may seem standard and straightforward they are of the utmost importance as, generally, the accuracy and effectiveness of these representations and warranties are conditions precedent to the payment of the purchase price (either by upfront payment or by means of consecutive instalments), and any inaccu- racy or ineffectiveness may constitute default. Moreover, even though the Buyer has a non-participating interest in the mining project, it is a kind of de facto partner to the extent that it receives payment (either in cash or concentrates) upon actual production of the relevant mining project, generally without additional securities from the Operator’s shareholders or controllers.

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Securities As explained above, streaming agreements have increasingly become a mechanism to raise capital as an alternative to debt and equity funding, particularly for exploration and junior companies with limited budgets that prevent them from entering into loan agreements with traditional financial institutions – which normally involve providing full packages of securities that traditional project finance customarily requires. However, in practice, under streaming agreements the Operator will also be required to provide basic performance securities to the Buyer, at least with regard to the metal’s delivery obligation and the deposit’s repayment obligation. In general terms, under a Civil Code-based legal system, unless otherwise agreed by the parties, non-compliance from the Operator with their obligations under the streaming agreement would entitle the Buyer to enforce performance of the outstanding obligations or request the early termination of the agreement by means of a judicial claim, as well as to request compensatory damages owing to the lack of or delayed performance. If the Buyer is ultimately awarded with damages and the Operator fails to pay them upon formal judicial request, the Operator’s assets are seized and then sold in public auction, so ultimately the Buyer is paid with the sale’s proceeds. In terms of securities, performance of the Operator is normally secured by a mortgage granted over the project’s mining concessions from where the streamed metal is or will be produced (and even over future mining concessions that the Operator acquires for that project); a mortgage granted over the mining facilities related to such project; or by pledges over the streamed metal and other movable assets of the Operator, or any selection or combination of the above. For further coverage, the Buyer may even require the Operator’s shareholders or parent company to provide additional securities, such as joint and several liability and pledges over their shares in the Operator. It will all depend on the volume of the transaction and the level of exposure that the Buyer is willing to accept. In any case, regardless of the governing laws of the streaming agreement, securities over assets located in a specific country must usually be granted following the formalities imposed in that country and, generally, subject to the local law. For example, in Chile, as in other Civil Code-based jurisdictions, securities are granted by means of a public deed executed in Chile before a notary public, as both the mortgage and the pledges need to be registered with specific entities to become valid (namely, the mortgages and encumbrances registry of the relevant custodian of mines, and the Registry of Pledges without Conveyance of the Civil Registry and Identification Service). To enforce the securities, the Buyer will need to file for foreclosure of mortgages and pledges. Usually, in Civil Code-based jurisdictions, such as Chile, creditors do not gain ownership over the secured assets immediately upon execution of the securities. In general terms, securities only grant creditors the right to sell the securities in public auction by means of a realisation process, and receive the proceeds from the auction up to the amount equivalent to the secured obligations. Of course, the Buyer will be entitled to bid in the public auction and, if such bid is the highest, to acquire the secured assets for an amount to be credited against the outstanding debt. Additionally, if no interested parties participate in the auction, the creditor will be immediately entitled to acquire ownership over the secured assets.

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In addition to the mortgage and pledge over the Operator’s assets, the Operator will also grant the Buyer a prohibition to sell or dispose of those assets without the Buyer’s prior consent – which cannot be unreasonably withheld – unless the acquirer of the secured assets expressly assumes compliance with the secured obligations. Such prohibition could be also registered for publicity and enforceability purposes, although a breach by the Operator would only entitle the Buyer to file a claim for damages against both the Operator and the third party that knowingly breached such prohibition to transfer. Finally, in direct relation to the granting of securities in favour of the Buyer are the provisions related to intercreditor agreements, regardless of whether the Operator has already secured its assets in favour of other lenders and creditors. As streaming agreements do not necessarily prevent the Operator from engaging in traditional debt funding, which would impose certain indebtedness restrictions, an Operator would still need to obtain additional funding for its core business through traditional project finance, particularly since the deposit paid by the Buyer can be allocated at the Operator’s discretion. Accordingly, a streaming agreement would normally contain a commitment from the Buyer to subordinate the securities they have been granted to those granted in favour of banks or other financiers of the mining project. Naturally, if there are no funds to exploit and produce the primary metal, there will not be any production whatsoever of the streamed metal. The purpose of these intercreditor agreements is essentially to establish priority of interests and rights in events of default. Unlike streaming agreements, though, in which the parties’ interests are more or less aligned, intercreditor agreements entail a much more complex negotiation as the Buyer will push for the Operator to remain in operations, whereas the financial institution will pursue the realisation of the securities.5

Covenants Streaming agreements generally contain the following covenants: • Conduct of operations: streaming agreements are non-participating interests, meaning that the Buyer does not get involved in the operation of the mining project from where the streamed metal is produced, and the Operator is solely and exclusively responsible for deciding how to conduct its business, with the primary metal being the main focus and concern. However, to protect the Buyer’s interests to some extent, under streaming agreements the Operator will normally be required to conduct its business and operations pursuant to accepted mining practices, and to deploy its best commercial efforts to comply with agreement’s terms. The Operator, however, would be bound by reporting obligations with the Buyer with regard to types, tons and grades of ore mined, material damage that would require insurance claims, revocation or suspension of material permits, and other events that could qualify as a ‘material adverse effect’ under the agreement. The Buyer, in turn, will be granted the right to access the Operator’s books and records, and visit rights to the site for the inspection of such mining, processing and

5 MacKay and Bennett, 2014.

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infrastructure operations, all with prior notice and without affecting the Operator’s normal course of business. • Preservation of corporate existence: both parties are required to do all things necessary and advisable to maintain their corporate existence. For this purpose, the parties may agree on certain restrictions to internal reorganisation processes, for instance, provided that after the reorganisation the relevant core assets of the mining project are owned by an affiliate. • Commingling: the Operator is usually allowed to process and commingle the streamed metal with minerals obtained from other mining projects or properties, to the extent that the Operator is able to effectively adopt practices and procedures for weighing, sampling and assaying, and determining recovery factors. • Offtake agreements: depending on the payment structure of the purchase price or consideration, the parties may agree that the Operator is entitled to enter into offtake agreements with third parties, provided that such agreements are negotiated on commercially reasonable arm’s-length terms, and that the Operator takes all the commercially reasonable steps to enforce its rights and remedies under the offtake agreement. • Insurance: the Operator will be required to maintain insurance with respect to its core assets and operations against casualties and contingencies, and in amounts as is customary in the mining industry for similar operations, as well as with respect to ship- ments of the streamed metal, if applicable.

Buy-back and other rights Although streaming agreements allow mining companies to add value to non-core products, they also limit the Operator’s exposure to the streamed metal.6 Taking into account that streaming agreements have a long-term duration (over 20 or 25 years), if not life-of- mine, the parties may include the Operator’s right to buy back part of the streamed metal within a limited period of time, following commencement of the metal’s deliveries. Likewise, the Buyer can be granted a right of first refusal, to be exercised upon the Operator receiving an offer from a third party to acquire available amounts of streamed metal, as well as a right of first offer regarding additional amounts of streamed metal that the Operator wishes to sell, both of which allow the Buyer to increase the amount of streamed metal deliveries without substantial variations to the already agreed on fixed price. The Operator, in turn, will be reluctant to grant a right of first offer considering the long-term duration of the agreement and the unforeseeable variations of the market price and the production costs.

Dispute resolution Under streaming agreements, disputes regarding the amount of streamed metal delivered to the Buyer or the calculation of the uncredited balance of the deposit are typically

6 Mining Journal, Global Mining Finance Guide 2014, p. 53. Available on https://www.mayerbrown.com/ files/Publication/3e2dc5e3-878a-40a2-8b06-cb75f8d632ba/Presentation/PublicationAttachmen t/86b233d1-beb2-4f47-9b85-cd4793b90b92/global_mining_finance_guide_jan14.PDF. Last reviewed on 23 August 2018.

26 © Law Business Research 2019 Streaming Agreements resolved amicably by the parties on a first instance, within a specific period established for that purpose. If no agreement is reached within such period, the matter will be submitted to an auditor appointed by the parties out of a predetermined list of auditors contained in the agreement, or otherwise by appointing an auditor that has sufficient and reputable experience in the matter. Ultimately, objections to the auditor’s report or any other issue regarding the interpretation, validity, enforceability and termination of the streaming agreement are commonly resolved by an arbitrator instead of ordinary courts, as the parties are normally from different jurisdictions. Determination of the rules of the arbitration depends entirely on the jurisdiction of the parties involved in the agreement and, most importantly, on the jurisdiction of the mining project and the secured assets. The determination of the number of arbitrators relies not only on economic considerations, but also on corporate policies of the mining companies that seek further impartial- ity, particularly when the arbitrator’s decision is final and binding upon the parties. One of the most important matters to take into account when choosing the laws governing the agreement and arbitration over ordinary justice, is that the governing laws and the rules of arbitration are compatible with those of the jurisdiction in which the secured assets are located, so that there are no obstacles to the local enforceability of the securities based on an arbitrator’s judgement issued pursuant to a foreign law.

Tax matters Applicable tax to payments and deliveries of metal under streaming agreements depends on tax laws of the parties’ corresponding jurisdictions and, if they are different, on whether there are double-taxation treaties in force. In any case, streaming agreements normally provide that all deliveries of streamed metal or payments made by a party will be made without any deduction, withholding or charge because of taxes imposed by the relevant authorities. In general terms, under Chilean law a non-resident Buyer will not be levied with taxes for deliveries of metal, whereas the resident Operator will be levied with general income taxes upon reception of the consideration or purchase price. However, considering that the Operator may be required to repay the uncredited amount of the upfront payment under certain circumstances, such initial upfront payment may be structured as a security or as a payment subject to a condition so that the corresponding taxes are only accrued and paid once the streamed metal is delivered and actually credited against the received funds. Also, if the deposit’s repayment obligation bears interests, such interests are subject to a withholding tax at a rate of 35 per cent of the amount paid. Conversely, purchase of streamed metal by a local Buyer to a non-resident Operator is also subject to a withholding tax at a rate of 35 per cent of the amount paid. Finally, if both parties are residents, payments made under the streaming agreement are subject to general income taxes as well as value added tax at a rate of 19 per cent of the amount paid. Consequently, one of the main concerns when negotiating and drafting streaming agreements is how to properly structure the initial payment and repayment obligation, so as to avoid taxation authorities interpreting these agreements as debt instruments, or requiring payment of taxes beforehand, particularly owing to their long-term duration.

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For this purpose, the parties may agree that following the execution of the agreement the parties may implement adjustments to its structure to facilitate tax planning.

Confidentiality Parties to streaming agreements usually agree to maintain confidentiality and not disclose the terms of the agreement as well as all information received or reviewed by them in relation thereto (i) except with prior approval of the disclosing party, (ii) to auditors, legal counsels, lenders and, in general, anyone for whom the confidential information would be relevant, or (iii) when the information has already been disclosed to the public other than by a breach of the confidentiality terms of the agreement, or is known by the parties prior to entering into the agreement, or has been obtained independently. They also agree to comply with the applicable laws or judicial order.

Change of control Aside from restrictions to the disposition of shares or equity rights over the Operator that the Buyer may request as additional security from the Operator’s shareholders or parent companies, streaming agreements typically contain restrictions on changing control of the parties. Naturally, such restrictions are stricter on the Operator’s side, as a change of control may entail a reorganisation process that would ultimately affect the decision to continue with the mining operations subject to the streaming agreement. Accordingly, change of control of the Operator would not be allowed unless the Operator agrees that its obligations under the streaming agreement will continue in full force and effect despite the change of control, or unless the Operator’s obligations under the agreement are assumed or at least guaranteed by a third party in favour of the Buyer, in which case the Operator is released from its obligations. Another restriction on change of control, applicable to both the Buyer and the Operator, requires prior consent from the counterparty, and that the person or persons acquiring such control is not a ‘restricted person’, that is, a person included on governmental lists of prohibited parties or subject to trade restrictions, or both.

Advantages and disadvantages Despite the current relevance and presence of streaming agreements in the mining industry, there are some downsides for parties involved in those transactions.7 For instance, there may be negative impacts on the cash costs of the Operator as, once a streaming agreement is in place, the by-product credits cannot be deducted from operation expenses. Also, if an Operator agrees to sell a percentage of the production of a specified streamed metal, the Buyer will benefit from operation expansions, although the amount of the deposit and the fixed price will remain invariable and, therefore, there will not be any additional capital contributions from the Buyer. This price invariability may also be detrimental to the Operator if the purchase price of the streamed metal is set

7 id.

28 © Law Business Research 2019 Streaming Agreements too low from the market price, without the possibility of readjusting the fixed price once the agreement is in place. Nonetheless, there are greater advantages in entering into streaming agreements. From the Operator’s side, the deposit received as part of the purchase price can be freely allocated, and without diluting the shareholders’ equity interest; the obligation to sell the streamed metal is subject to the implied condition that such metal is actually produced, without the Buyer’s intervention in the business; and, more importantly, they allow the Operator to monetise non-core products even before they are produced. Also, they can be perfectly combined with other forms of financing without affecting the Operator’s borrowing capacity, because in the majority of these agreements the streamed metal is a by-product of the Operator’s core business. From the Buyer’s perspective, streaming agreements allow them to secure long-term deliveries of metal (whether in the form of actual concentrates or credits in metals accounts) below the market price, without assuming operational costs and risks. Though traditional debt and equity funding are still available for large mining companies with solid financial backgrounds, exploration and junior mining companies have had to seek alternative funding mechanisms. Owing to their flexible nature and the appearance of specialised non-traditional investors, streaming agreements are acquiring a predominant role in the finance of mining projects, as they are accessible by any mining company regardless of their size and the stage of development of their projects. Consequently, streaming agreements and transactions are continuously evolving into more sophisticated non-traditional finance instruments and a relevant trend in the mining industry worldwide.

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Legacy Issues in M&A Transactions

Jorge Alberto Ledesma García and Jorge Ruiz1

Introduction Legacy liability (also known as successor liability) in M&A transactions is of key importance as it may significantly impact the value of the acquired target and the overall viability and success of the intended business. Because of this, it is necessary to allocate sufficient resources, time and attention to the analysis and assessment of the activities and matters that may cause legacy liability. The above is particularly true when a transaction involves the acquisition of a company or assets that are primarily dedicated to, or used in connection with, highly regulated activities such as mining – which is dependent on governmental concessions – permits, licences and authorisations that may be suspended or even revoked. The existence and treatment of legacy liability differs greatly in countries of civil law rather than common law tradition. Civil law systems are generally less advanced in this regard, since they heavily rely on dated legal provisions and not on dynamic case law. Because of this, is not possible to give an all-encompassing analysis on the subject, and prospective purchasers should always seek the advice of local counsel in the relevant jurisdictions involved in an M&A transaction. The legacy liability issues included in this chapter are analysed under a civil law perspective with particular emphasis on the Mexican legal system, which may be similar to the legal systems of other civil law tradition countries, mainly those in Latin America. In the following sections, this chapter will (i) provide a brief overview of the different structures to carry out an M&A transaction, and analyse the general implications of such structures under a legacy liability standpoint, (ii) flag the areas that typically involve legacy liability issues in the mining sector, and (iii) discuss some of the strategies and tools available to minimise legacy liability risks involved in an M&A transaction.

1 Jorge Alberto Ledesma García is a senior associate and Jorge Ruiz is a principal at Baker McKenzie.

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Structures to carry out M&A transactions In Mexico, an M&A transaction is usually structured and carried out as one of the following: • share acquisition; • asset acquisition; • merger; or • a combination of the above.

From a Mexican legal perspective, the most relevant distinction between an asset and a share acquisition is that in a share acquisition, the purchaser will assume the entire liability from the target company. In contrast, in an asset acquisition, the purchaser will generally only absorb liability on the assets acquired, unless such acquisition is classified as one of a going concern or business under Mexican tax legislation and precedents, in which case the purchaser may be deemed jointly and severally liable with the seller for past tax obligations of the seller and its business. Because of the above, asset acquisitions are in themselves a way to minimise the risk of facing legacy liability, and share acquisitions tend to be subject to more lengthy and detailed pre-acquisition due diligence review in order to assess, identify and – when possible – quantify the potential liabilities of the target company that will be assumed by the purchaser. From a legacy liability perspective, a merger in Mexico entails a universal transfer of all assets and liabilities of the disappearing entity to a surviving or newly formed entity. The surviving or newly formed entity becomes a successor in interest of the disappearing entity; thus, there are no resources to mitigate legacy liability issues, because all outstanding liability of the disappearing entity is transferred to the surviving or newly formed entity.

Areas that may involve legacy liability issues Overview In Mexico, the mining industry is regarded as a strategic activity owing to its various far-reaching and long-term impacts to the environment, and social and economic landscape, as well as government policy regarding the use of natural resources that are deemed to be originally owned by the government. Therefore, asset acquisitions focused on mining operations may be prone to facing legacy liability on many fronts, which typically include the following: • environmental matters; • real estate matters (ownership, leasehold, temporary occupation and easements); • permitting matters; • labour and employment matters; • social and community impact matters; • taxes; and • breach of contractual obligations.

The areas that may pose a risk from a legacy liability standpoint are discussed below.

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Environmental matters Owing to the need to protect several ecosystems and some of the most valuable natural resources, many countries such as Mexico require mining companies and operations to observe several laws and regulations intended to protect the environment and to minimise the negative impact that mining exploration and extraction activities may have on non-renewable natural resources, and indigenous animal and vegetal species. Many of the applicable environmental laws have strict penalties and long-lasting statute of limitations provisions designed to discourage practices that may harm the environment, and to penalise violations. Such provisions may also require the performance of remedial actions to reverse the damage caused to the environment to the full- est extent possible. In many cases, mining requires the use of explosives and toxic substances, which need special procedures to be stored, handled and disposed of. Mining companies may also have to get special permits to buy, use, store and manage these materials. The incorrect use, storage or management of these substances may lead to lasting environmental damage and penalties that may negatively impact or cripple the continuance of an operation. During the pre-acquisition due diligence review, a prospective purchaser should be particularly careful to request all available supporting documents and permits regarding the acquisition, use, storage, management and disposal of any potentially dangerous substances that may cause damage to the environment. It is also advisable for the purchaser to review the environmental impact statement, and conduct business compliance reviews, including Phase I and Phase II environmental site assessments to ascertain whether an actual risk exists, as well the scope and scale of any corrective action that is potentially required to remediate any pollution at the relevant site. These site studies are relevant as environmental damage is not always apparent, and its effects may be suffered over a long period. It is also important that purchasers make sure that the consulting firm entrusted with the issuance of the Phase I and Phase II reports are reputable firms that expressly allow the purchaser to rely upon the conclusions of said reports through the issuance of a reliance letter. Prospective purchasers can inherit legacy environmental liabilities resulting from past activities performed on a site currently or previously owned by the acquired target company or business, as well as regarding non-compliance with administrative provisions set forth in the corresponding environmental licences or authorisations. In jurisdictions such as Mexico, in some extreme cases the lack of certain relevant environmental authorisations can also lead to criminal liability for certain corporate officers with knowledge of the lack of required permits or authorisations.

Real estate matters Mining operations usually require the extensive use of real estate property, which must be legally secured either though purchase, leasehold, easement or other temporary use rights. An additional complication is that mining grounds are usually located in a rural setting, which may require additional permitting to allow those lands to be used under a land regime appropriate and consistent with the mining exploration and extraction activities. Filings and requirements for change of land use can be burdensome and take

32 © Law Business Research 2019 Legacy Issues in M&A Transactions significant time to be completed. Operating without the proper land use authorisation can lead to hefty fines and temporary closure of the site. Another issue to consider is that some jurisdictions such as Mexico have communal land ownership regimes that may affect the land on which mining projects are located. Those land ownership regimes may require additional due diligence review, and actions to properly secure the use of real estate properties. In some jurisdictions, the procedure to acquire or secure use rights over land subject to communal ownership regimes are cumbersome and time-consuming. Communal land ownership regimes normally function like a corporation (ie, they have a corporate governance body such as a general board of communal owners, which is required to vote and approve significant matters affecting the land, such as long-term leases and disincorporation of portions of land from the communal regime for its subsequent transfer). These approval processes can also be time-consuming and may entail negotiations with a high number of owners with different and occasionally opposing interests. Because of these matters, prospective purchasers are highly encouraged to seek specialised advice for real estate matters from the due diligence review phase and all through the post-closing phase. Other issues such as protected areas and archaeological sites should also be considered and analysed. A prospective purchaser may face legacy liability owing to omitted payments of real estate taxes, rent or lack of permits in connection with the authorised use of land, as well as for infringement of a third party’s property or leasehold rights owing to unlawful real estate use, or occupation by the target company or business. Searches of publicly available real estate information are a useful resource to ascertain whether some of these contingencies exist and how to effectively manage them.

Permitting issues Permitting issues are some of the most relevant items to consider in mining M&A transactions, owing to the highly regulated nature of mining operations. A lack of proper permits can lead to material fines, and even to the temporary or permanent closure of the mining operation. In some countries, mining exploration and exploitation activities require an authorisation granted by the government. This is particularly common in Latin America, with countries such as Argentina, Brazil, Chile, Mexico, Colombia, Peru and Venezuela requiring some form of authorisation or ‘mining concession’. In Mexico, for example, the relevant authorisation is a mining concession, and it is required based on the premise that some of the minerals located in the subsoil may be deemed as originally owned by the Mexican state. Some countries may also have additional restrictions on mining activities that must be observed, such as foreign investment restrictions, or owing to the nature of the mineral subject to extraction. For example, in Mexico, any activity or industry related to radioactive minerals is exclusively reserved for governmental authorities and entities, and cannot be performed by private individuals or entities. Many of the required permits need subsequent renewals or update procedures, which are continuous and recurring obligations of the permit holder, and that may entail payment of significant fees to keep the corresponding rights in good order. The lack of payment of these obligations, or lack of observance of the terms of the relevant permits, can

33 © Law Business Research 2019 Legacy Issues in M&A Transactions lead to fines, accrual of interests over amounts due and other administrative penalties, such as suspension of the relevant rights or revocation of the corresponding permits. Purchasers may face legacy liability owing to omitted payments or updates required under acquired permits that were previously granted, as well as for activities carried out within sites currently or previously owned by the acquired target company or business without the proper permit or authorisation.

Labour and employment issues On a transfer of assets, the scope of labour liability assumed by the purchaser will vary depending on the specific circumstances of the transaction and the method of performing the transfer of employees. In Mexico, there are two methods to perform the transfer of employees to an asset purchaser: • employer substitution; and • employment contract termination and rehire.

Generally, the method for transfer of employees may be freely determined by the parties involved; however, under certain binding court precedents, if the majority or all of the assets required to carry out the employer’s operations are transferred to the purchaser, an automatic employer substitution occurs, which means that the purchaser will assume significant labour legacy liability. Nevertheless, if only certain and limited assets of the seller are transferred to the purchaser, only the employees whose employment activities are related to those assets may be subject to an employer substitution. In the employer substitution scenario, the substitute employer (ie, the purchaser of the assets or its designee) will assume liability for salaries, labour benefits, length of service bonuses and all other employment conditions of the employees of the target company. When an employer substitution takes place, employees are, as a general rule, not entitled to severance pay, as long as the new employer assumes and maintains all of their former employment conditions and benefits. In the event that the substitute employer cannot match all the previous working conditions, the substitution of the employer will not be enforceable, and employees may terminate the employment relationship for cause. In that case, the employees will be entitled to receive the mandatory severance pay provided for in the Mexican Federal Labour Law. In an employment substitution scenario, both the outgoing employer (seller) and the new employer (purchaser) are jointly liable for labour obligations, including unpaid social security contributions for a period of six months after the effective date of the employer substitution. The other method of transferring employees in Mexico is the employment contract termination and rehiring of employees, which can also have two variants. The type of variant that is used will also impact the scope of labour liability that is assumed by the purchaser. The two types of employment contract termination and rehiring of employees are as follows: • employment contract termination and rehiring without recognition of seniority; or • employment contract termination and rehiring with recognition of seniority.

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If a seller terminates its employment relationship with employees and the purchaser then rehires them without acknowledging their length of service (seniority) with the former employer, the employees would be treated as newly hired employees of the purchaser; thus, the purchaser would be entitled to freely determine new terms and conditions of employment and, in turn, the employees would be free to accept those conditions of employment or not, depending on the prevailing market terms for similar positions or other factors to be evaluated by the prospective employees. However, in that case – and because under Mexican law an employer may not terminate the employment relationship with an employee absent a statutory just cause of termination – the employees will be entitled to mandatory severance as required under the Mexican Federal Labour Law, and the termination agreement is subject to the additional formality of approval by the relevant conciliation and arbitration board. The alternative to employment contract termination and rehiring without recognition of seniority usually seems very attractive to prospective purchasers since it entails less risk and cost because the purchaser will not assume any legacy liability from the prior employment relationship or the termination costs of the transferred employees. However, sellers tend to be more reserved in using this alternative because payment of mandatory severance can be costly. Because of the above, the parties of an asset deal usually spend a significant amount of time discussing and negotiating which party will pay termination costs, or how the parties will split those costs. An alternative to this somewhat polarising method is the employment contract termination and rehiring of employees with recognition of seniority by the purchaser. In that scenario, the seller would only pay to the employees all unpaid salaries, holidays and bonuses, etc, that accrued with the seller, but not mandatory severance. In this method, the purchaser will assume legacy liability for the mandatory severance calculated based on the total length of service of each employee (including length of service of the employee with the seller as the former employer) whether and when the purchaser decides to terminate the employment relationship with the relevant employee. As described above, this alternative can be viewed as a middle ground, since it requires both the seller and the purchaser to assume a portion of liability in connection with labour benefits, and costs owing to a termination. In share acquisitions or mergers it is important that the due diligence carefully addresses the number of employees and the amount of salaries and other benefits granted by the target company; labour contingencies to be transferred to the purchaser may be high in cases where the target company has employees with significant seniority who may be entitled to benefits that are above the standards provided by applicable law.

Social and community impact matters Although social and community impact matters are more present and highly developed in other sectors such as energy generation, in that sector, Mexican legal provisions require developers of energy projects to perform studies to determine the impact of a project. Even in the absence of express requirements in connection with social impact studies, purchasers and developers of mining projects should be mindful of the social and community impact that the mining activities may have upon indigenous communities, the general health and quality of life of settlements near the project site, and potential damage or negative impact to historic or cultural assets.

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The concept of social and community impact is far-reaching and may be connected with other matters discussed in this piece, such as environmental and real estate matters. A clear example of legacy liability issues in connection with social and community impact may be archaeological findings. If an acquired site has unreported archaeological findings, the purchaser may face legacy liability, which could jeopardise the continuous operation of a mine.

Taxes As previously mentioned, asset acquisitions generally pose a decreased risk for legacy tax liability, unless the acquisition is deemed a transfer of going concern, in which case the purchaser could face joint and several tax liability with the seller in connection with past tax liability related to the acquired assets or business. The risk of facing legacy tax liability may be addressed by breaking down the components of the going concern, and having several entities of the same group acquire the different components. Share acquisitions and mergers entail full transfer of tax liability to the purchaser.

Breach of contractual obligations In asset deals, the purchaser will acquire all legacy liability and pending obligations derived from the contracts that are assigned or transferred. It is possible to exclude certain obligations through the partial assignment of rights; however, this structure is uncommon since it is complicated and may lead to conflicts in outlining the obligations retained by each party of the agreement, which could in turn lead to further conflicts and litigation. In asset deals, the due diligence review should carefully analyse the contracts that are required for the operation of the target business or assets, and then exclude all other contracts from the operation, thus limiting the liability assumed through the acquisition.

Tools to manage legacy liability risk Structure of the transaction As previously discussed, as a general principle to minimise legacy liability issues, it is advisable to structure the transaction as an asset acquisition rather than as a share acquisition or merger. This should be carefully analysed because even if asset deals may be a good way to minimise legacy liability issues, it is very important to accurately define the scope of the assets to be acquired in order to ensure that the purchaser will have all the assets required to pursue its intended activities. Asset deals may be harder and slower to implement in Mexico owing to required transfer formalities applicable to certain assets, such as real estate and intellectual property. Share acquisitions are generally simpler and quicker to implement since there is no need to list the assets of the target company or to make a detailed purchase price allocation among acquired assets. Mergers are also a typically slower structure, which is generally chosen owing to the possibility of qualifying for tax exemptions if certain requirements are met. It is also possible to structure an M&A deal as a debt-free transaction. In that way, the purchaser will avoid assuming legacy liability related to prior economic commitments of the target company, business or assets.

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Using a special purpose vehicle The purchaser may use a separate newly created special purpose vehicle to acquire the assets or even shares from the seller. In that way, the purchaser will insulate itself from the liabilities acquired from the seller subject to applicable corporate veil piercing principles. For corporate restructuring purposes, the purchaser may also set a reasonable period, after which – if no unknown or undisclosed liabilities arise – the special purpose vehicle may transfer the assets directly to an operational subsidiary of the corporate group of the purchaser, or the special purpose vehicle can be merged into the operational subsidiary. The creation of special purpose vehicles in Mexico is inexpensive but could require some additional time, so careful planning and scheduling is always advised.

Pre-acquisition due diligence review The scope and depth of the pre-acquisition due diligence review varies depending on the transaction structure, where typically asset deals have less in-depth due diligence reviews because the risk of unknown or undisclosed liabilities is generally lower. However, pre-acquisition due diligence reviews for asset deals should be more detailed regarding the areas of concern that may pose significant legacy liability risk highlighted in the preceding section, as well as any other risk area particularly relevant in accordance with the target business. A detailed and comprehensive due diligence review will certainly help the purchaser to identify areas of risk, and might also provide supporting arguments to request and use other tools to minimise the risk – which will be discussed in this chapter – such as insurance policies, or provisions in the purchase agreement such as holdback, escrow and indemnity.

Provisions of the purchase agreement Provisions of the purchase agreement are the basic and first tool of defence against a legacy liability claim. There are a number of different provisions that can be included and negotiated in the purchase agreement that may help the purchaser to minimise the risk of legacy liability. These provisions include the following: • Representations and warranties – comprehensive representations and warranties allow the purchaser to make an indemnity claim against the seller, if legacy liability claims arise in connection with matters stated in such representations and warranties. Areas of concern for legacy liability risk should be subject to strict representations and warranties stating that the seller or the business are in compliance with its obligations under applicable law, permits, authorisations and in-force agreements. In that way, the purchaser will be able to claim breach of representation and warranty, and seek indemnification if a third party initiates action against it in connection with matters such as breach of contract or applicable law that occurred prior to closing. • Extended survival period of representations and warranties – as a complement to having strict representations and warranties in the purchase agreement, it is suggested that the purchaser includes extended survival periods regarding key representation and warranties, in order to have more time to seek an indemnity claim. The duration of extended survival periods is a matter of negotiation, but in areas such as

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tax liability, the survival period normally extends to match the applicable statute of limitations of actions of governmental agencies seeking payment of omitted taxes. • Indemnification security provisions – in transactions where legacy liability risk is high, it is advisable that the purchaser looks to include methods of securing funds to cover any eventual breach of representations and warranties, such as escrow or hold-back provisions. Hold-back provisions are not usually favoured by sellers because the release of the hold-back amount is highly dependant on the purchaser. Escrow provisions, however, are normally better received by sellers since they usually include detailed and objective mechanisms for the release of funds, but the use of escrow agents may add complexity and cost to a simple transaction; thus, it should be analysed considering the specific circumstances and needs of the parties.

Insurance As a general comment, insurance policies linked to all kinds of M&A-related liabilities are not widely available or used throughout Latin America, especially in Mexico. Most of the comments included in this section are based on products available and contracted in the United States. However, non-Mexican or non-Latin American companies may obtain ‘umbrella’ coverage extending to subsidiaries in other jurisdictions. There are different types of insurance policies that can be used to mitigate some matters arising from legacy liability, such as product liability insurance, completed operations insurance, pollution legal liability insurance, and representation and warranty insurance. The pre-acquisition due diligence review should focus on reviewing the existing insurance coverage of the target company to properly assess the risk, and whether such risk might be mitigated by the existing insurance policies. The review will directly impact the need to use other tools to minimise the risk derived from legacy liability. The due diligence review should also focus on the possibility of assigning, or otherwise transferring, the rights of the policy holder to the purchaser, and whether the existing policies will provide coverage for liabilities assumed by the acquiring company – it is common for liability insurance policies to terminate upon a change of control, or to be cancelled upon a sale of the business. In those cases, the purchaser is advised to request the seller to purchase extended coverage to address and cover any potential claims that may arise post-closing but related to losses or injuries that occurred prior to closing. The duration of the extended coverage should be analysed considering the applicable statue of limitations. There are many other issues that should be considered during the review of existing insurance coverage such as insurer solvency, choice of law, trigger of coverage and policy limits. All these factors are relevant since they might limit the coverage and leave the purchaser exposed to risk. The choice of law is a particularly important provision since the availability and scope of recovery under policies will vary greatly depending on the governing jurisdiction. Owing to its relevance for M&A transactions, its usefulness to address legacy liability for matters related to breach of representations and warranties that expressly refer to compliance by the seller, and its increasing use, this section will pay special attention to representation and warranty insurance. Representation and warranty insurance covers

38 © Law Business Research 2019 Legacy Issues in M&A Transactions damage and losses that might be caused to the purchaser by breach of the seller of one or more of its representations and warranties included in the relevant purchase agreement. The terms of a representation and warranty insurance policy can be customised to meet the needs of a particular client in a specific transaction, with certain clauses typically varying from operation to operation, such as the amount and duration of the coverage. Representation and warranty insurance is typically structured in such a way that the purchaser achieves the same economic and financial result that would be obtained from a more traditional escrow or indemnity structure. Representation and warranty insurance can cover all the representations and warranties included in the purchase agreement, and may be effectively used in connection with representations and warranties given by the seller about matters that pose high legacy liability risk. Representation and warranty insurance may also help smooth the negotiation process between the purchaser and the seller since it limits the seller’s indemnity obligations while serving as the purchaser’s sole source of recovery. The agreement between the purchaser and the seller to contract representation and warranty insurance should not prevent the purchaser from performing a detailed pre-acquisition due diligence review. The underwriters of the representation and warranty insurance policy will require a review of the due diligence report that was prepared, and will likely not issue the policy if the review is not sufficiently detailed. Also, the policy will not cover matters that were disclosed to the purchaser during the due diligence review or in the disclosure letter prepared by the seller. The underwriters of representation and warranty insurance will also likely request a reliance letter from the firm that issued the due diligence report in order to grant the coverage. In some jurisdictions, specific coverage for legacy or successor liability is available, but it is rare and can be expensive owing to the increased exposure of the underwriter.

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Selected Commercial Mining Agreements

Carlos Vilhena and Adriano Drummond C Trindade1

This chapter aims to address some key agreements in the mining industry, focusing on how they can affect mining ventures at an international level, as well as what the current related trends, opportunities, challenges and risks are within the industry that are of concern. High-risk, long-term, capital intensive. These expressions are familiar to mining lawyers, and define mining projects. The risk is not limited to the geological factors, but may be added by political aspects, market downturns, recycling and substitution, development of new technologies, and social and environmental concerns. The time lag between the first drilling and sampling activities, and the commencement of commercial production may comprise a couple of decades or more. Further, cash availability in the market is dramatically influenced by interest rates, market forecasts, variations in demand and the security package, to name just a few. The industry developed mechanisms to share the risks involved in a project to make it more acceptable to mining companies. Even where the risk may be not so high, but the schedule for exploration, development and mining is particularly long or uncertain, such mechanisms may also be useful to reduce the impact of time. This is also true for access to funds required in a mining project, particularly towards the critical milestones where a pre-feasibility study and bankable feasibility study need to be prepared, or for development and construction purposes. From a legal perspective, some of those mechanisms involve negotiating and entering into agreements whereby part of the risk may be split with another entity, as in a joint venture or in an earn-in arrangement, or with an entity that will advance funds in exchange for a royalty or the right to buy minerals at a discounted price (as in streaming

1 Carlos Vilhena is a partner and Adriano Drummond C Trindade is a counsel at Pinheiro Neto Advogados.

40 © Law Business Research 2019 Selected Commercial Mining Agreements deals). The purpose of this chapter is to look into those relationships and discuss the main features of joint ventures, option agreements, and royalty and streaming agreements.2 Among the various features inherent to each agreement, there are also two main aspects that deserve a closer review in specific items: differences in perspective from junior companies and majors; and common law and civil law concerns to be addressed in those agreements.

Selected mining agreements This section reviews some issues to be considered in specific agreements that are frequently negotiated in the mining industry. In the case of joint venture agreements, comments usually applicable to joint ventures in general could also be repeated here, so this section concentrates on specific concerns relating to the mining sector. It will also address option agreements as a structure allowing preliminary access to mining properties and the review of their potential with the possibility of acquiring them, and royalty and streaming agreements, which may represent an alternative to traditional financing mechanisms.

Joint venture agreements There are a number of reasons why mining companies may enter into joint venture agreements, which may go from a circumstance where the original property owner does not want to give up its ‘ownership rights’ entirely and keep a stake in the property, to cases where it is desirable to have a local partner, or a partner that has exclusivity or familiarity with certain technology that will be useful in the mining project. By and large, however, the main reason for joint ventures in the mining sector is the need to share the risk of the project with someone else, in addition to sharing the costs, which are usually very significant and may well reach 10-digit figures until production starts. Although joint ventures may be of a contractual, unincorporated nature and have the form of partnerships, particularly in the United States and Canada, corporate joint ventures are more frequent in cross-border transactions, especially in civil law countries. Special purpose entities are incorporated to play the role of the vehicle of the project. The main legal consequence is that liabilities relating to the enterprise will be limited to the joint venture company, but in some circumstances legislation and courts may allow for the piercing of the corporate veil (such as for environmental matters). Another consequence is that title to the mineral property is usually transferred to the joint venture company. In those jurisdictions where legislation does not allow for multiple holders of the same mineral property, this feature gives more comfort to the party that would not hold the property if the unincorporated joint venture structure were adopted. Joint venture agreements may be complex agreements dealing with various sets of rules and procedures regarding the exploration, development, construction, production, closure and even reclamation of a mine. But even for those cases where the joint

2 There are other relevant agreements typically found in the mining sector, such as operation agreements, financing and credit agreements, ancillary project finance contracts, offtake agreements, and community development agreements. These are beyond the scope of this chapter and we will not delve into those subjects, despite their importance.

41 © Law Business Research 2019 Selected Commercial Mining Agreements enterprise does not require sophisticated arrangements, some key issues will inevitably be addressed in the agreement, such as the contributions of each partner, the apportionment of responsibilities, management and decision-making process, cash calls and dilution. The joint venture agreement may be combined with, or arise from, an option agreement or an earn-in agreement. In those circumstances, the typical scenario will be for one party to contribute the mineral property and associated information to the joint venture company, while the other party contributes funds and exploration expenditures. In some cases, each of the parties may contribute a set of mineral properties, in an effort to combine businesses. In both situations, the key aspect to determine the interest of each party in the joint venture is the value attributed to the mineral properties. Since the value will change over time considering the geological information available and the level of exploration, the joint venture agreement should clearly set out the rationale and the value attributed to each mineral property. Although the interest of each joint venture party is defined at the outset of the relationship, it may vary during the life of the joint enterprise. On the one hand, the agreement may provide for mechanisms where one party may increase its interest upon the accomplishment of specific milestones. On the other hand, cash calls need to be met by the joint venture parties and, if such calls are not met, the party in default is usually diluted. Depending on the circumstances of the default – for example, if a party commits to meet a cash call and then fails to do so – dilution may be accelerated. Usually, joint venture agreements contain a provision whereby if a party is diluted below a certain minimum interest (frequently 10 per cent), its interest in the joint venture is converted into a royalty. In this case, the minority party will exit the joint venture and will become a royalty holder. The decision-making process must be clearly provided for in the joint venture agreement. Even if the majority party may have control over most of the decisions, the minority party will probably want to take part in key decisions (eg, approving budgets and cash calls, approving a bankable feasibility study, contracting debt and putting a property into production), so supermajority requirements may be put in place. In structures where the roles of majority and minority parties may change (eg, where earn-in provisions may apply), the definition of the quorum and the rights of the minority party may prove difficult to negotiate. In order to make the project management more dynamic, a board may be set up to deal with technical matters, in which the minority party may have a seat. In any case, the parties must ensure that the joint venture structure and quorum for decisions match those provided for in underlying corporate legislation. The apportionment of responsibilities is also a matter frequently dealt with in joint venture agreements. One of the parties will probably take the lead in management (and may even charge a fee for that), so the other party should have instruments to oversee the activities and to have access to information. Where the two parties have more active roles, then the definition of the obligations of each needs to be carefully described in the joint venture agreement, with special care given to those situations where one’s obligation depends on the fulfilment of the other party’s obligation.

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One last matter involves the right to exit the joint venture. Although forced dissolu- tion and partition mechanisms are not so frequent in the mining sector, given that the mineral property cannot be simply split between the parties, usually each party has the ability to sell its interest to third parties. This right is usually limited by pre-emptive rights and rights of first refusal, tag-along and drag-along obligations, and put and call options.

Option agreements Option agreements are frequently employed with regard to properties that are at the exploration stage. On one side, the owner of the property needs funds to meet expenditure requirements and to perform exploration works within a certain time frame usually imposed by the law. On the other side, a mining company undertakes to meet expenditure goals and to perform certain works in order to have the right to acquire the property, or to enter into a joint venture with the property owner. Given the limited amount of geological information available, option agreements usually provide for expenditure commitments of the mining company, within certain time limits, on a stage-by-stage basis. Once the expenditures of the first period are met, the company has the option – but not the obligation – to progress to the next stage, where further expenditures will be required. This means that, as further geological information becomes available, the company can decide whether to move to the following stage or not (ie, whether new commitments will assumed). If the company decides not to progress any further, it loses all expenditures made and holds no stake in the property. In some structures – and depending on how far exploration works went – the company may have earned a right or interest on the property. Option agreements are usually employed by junior companies that have access to markets and capital when dealing with local property owners that do not have the funds or the expertise, or both, required for the exploration and development of the property. Such agreements are also used by mid-tier companies or even majors, but not as frequently in very early exploration stages. The typical option agreement entered into at an exploration stage would entitle the company to progress from one stage to the other, and to have the right to purchase the property within a certain period. It is common that option agreements provide for the acquisition of 100 per cent of the property, so that the owner will no longer be involved in the project. There may be a lump payment for purchasing the property, which is sometimes combined with a royalty – either at a fixed rate or at a progressing scale depending on the size of the reserves or of the production. In other cases, the option agreement may lead to a joint venture. Depending on how attractive the property may be, the property owner may require that an up-front payment be made at the beginning of the option period. This is a price for the right to have the option, which is different from the payment to be made for the acquisition of the property when the mining company exercises the option. Milestones are usually expressed in expenditure amounts, although periodical payments to the property owner may be required to progress from one stage to the other. Some option agreements may even detail the work to be done by the company to complete a stage (eg, drilling a minimum of X meters). Other milestones may include the

43 © Law Business Research 2019 Selected Commercial Mining Agreements preparation or reports on resources and reserves, or even studies as advanced as feasibility studies. Nevertheless, it is clear that the definition of eligible expenditures in the option agreement is a key aspect to be considered by the parties. Some agreements try to narrow down the eligible expenditures to those corresponding to actual work on the property, such as the cost incurred with drilling and sampling. Other agreements are more flexible and may include administrative costs related to the review of data from exploration works. In any case, it is important that the option agreement defines clearly and in detail the eligible expenditures, and provides for inspection mechanisms and dispute resolution provisions. Since the option agreement will involve commitments by the mining company, it frequently provides for exclusivity rights in favour of the holder of the option, so that third parties cannot undertake exploration in the same property. Accordingly, the property owner should not be allowed to sell it to third parties, nor enter into any sort of arrangement that would create an interest of a third party over the property. In cases where the property owner has already undertaken some exploration (usually when the owner is a junior company, or a company that may not be considering that property in its core business strategy), there is already some geological information available. Here, the milestones to be met may involve not only the performance of exploration works, but also the preparation of reports and studies to add value to the property, such as scoping studies, pre-feasibility studies or even bankable feasibility studies. The structure of those option agreements tends to be more sophisticated as they usually lead to long-term relationships, such as joint ventures, aiming at putting the property into production.

Royalty and streaming agreements Although royalty agreements and streaming agreements are different types of transactions, they are addressed in this section given their common feature of serving as an alternative means to have access to finance.

Royalty agreements Royalty agreements provide for the right of a party to participate in the results of a mining operation, either by receiving a percentage of the production in cash or – less frequently – in kind. Royalty agreements may have different origins. In some cases, the royalty is part of the price of acquiring the mineral property from a former owner. It may also be tanta- mount to a finder’s fee. In other cases, it works as a financing mechanism so that the royalty holder advances funds to the mining company to be used in the development and construction of the mine. As in a project finance structure, the royalty holder assumes part of the risk of the project, since its remuneration will depend on the mining company successfully putting the project into production. However, the royalty is not limited to a principal and interest, but is usually represented by a share of production through the life of the operation (although limitation clauses may be negotiated). There are different forms of calculating a royalty, the most frequent being an outright royalty calculated based on sales; a net smelter returns where certain deductions may be

44 © Law Business Research 2019 Selected Commercial Mining Agreements allowed; and a net profits interest where the royalty will be calculated based on the profit generated by the operation, so a long list of deductions are allowed. Royalty agreements usually have inspection mechanisms and access to information to allow the holder to verify if the royalty has been properly calculated and if the deductions were allowed, including the right to call for audits. These agreements also restrict the ability of the property owner to sell it without the royalty holder’s consent, particularly in jurisdictions where the royalty cannot be registered against title, in which case the purchaser of the property will probably be required to adhere to, and be bound by, the royalty agreement. One key issue of royalty agreements is to ensure that the right to mine is not lost, so compliance with legal and production requirements is a major requirement. Some royalty agreements provide for the right of the property owner to purchase the royalty (and cancel it). Another feature that may be inserted in those agreements is the requirement for a minimum payment if production has not reached a certain level, or if the property has been put into care and maintenance. This represents an increase in the cost of the royalty for the mining company. Special attention must be given to the mechanics for the payment of the royalty. Some jurisdictions impose restrictions in the remittance of funds, so depending on how the royalty is structured and where it is paid, there may be tax implications. Likewise, if the royalty is paid in kind, there may be export-control restrictions and tax implications.

Streaming agreements Streaming arrangements are contracts for the ongoing supply of mineral production under which, upon advance payment of a premium, the buyer agrees to purchase, at a fixed, discounted and predetermined price, part of the mineral production from a property. The stream may last during a certain period or even throughout the life of the mine. The mining company receives an upfront payment, which enables it to develop, con- struct and operate, or expand, the mine. This arrangement allows the mining company to capitalise on the basis of resources and reserves at a cost usually below that of loans. Streaming transactions have become more frequent in the mining sector, initially with regard to precious metals, but transactions that are more recent also involve base metals operations. Besides representing a fundraising mechanism to develop a mineral project, streaming also has the effect of guaranteeing a purchaser for part of the future production. Moreover, contrary to capital investment financing, streaming arrangements enable mining companies to minimise their risk of dilutions to shareholders and avoid debt financing osts,c particularly at times when credit access conditions are unfavourable. Streaming transactions may also benefit the purchaser in a scenario of increasing commodity prices, as it will be able to freeze the price of a future mineral purchase tend- ing to escalate, and resell such product at market prices. Similarly to financial derivatives, streaming arrangements fix the minerals price, avoiding the purchaser’s exposure to possible upward market price movements. Differently from hedging transactions,3 however,

3 Where a mining producer secures itself against the fluctuations of the market by locking into a sale agreement for future delivery at a predetermined price.

45 © Law Business Research 2019 Selected Commercial Mining Agreements streaming transactions usually contain a provision that payment to the purchaser will not be made at a predetermined price but rather at the lowest between a percentage of the market value and the amount agreed per volume of production. Because of these specific features, streaming companies have reported high return rates, particularly when the mine’s production exceeds initial expectations. As in royalty transactions, streaming agreements involve certain risks, which must be assessed. One of them is the possibility of the production being none or insufficient, preventing the seller from delivering the product volume as anticipated. Another risk is market volatility, as oscillations may affect the profit margins originally envisaged by the purchaser, and ultimately render production and, consequently, the streaming itself, unfeasible. From the mining company’s end, the streaming arrangement should not involve too large a share of the mine production, otherwise the overall revenue of the mine may be severely impacted as the sales price of the stream is, by definition, lower than the market price.

Different approaches to mining agreements Given the fact that mining transactions tend to involve multiple jurisdictions and companies with different profiles, this section deals with two aspects that are generally faced by mining lawyers when dealing with agreements: the perspectives of different types of companies, and the implications of different systems of law.

Juniors versus majors perspective The main reason a junior company with a promising mineral property would enter into a joint venture agreement with a major is when it requires the expertise and the money of a major company. The latter may also be the reason for entering into a royalty or streaming agreement with a third party. If this is indeed the case, the later the agreement is negotiated, the better for the junior. The more advanced the project, the more value has been created, and the more leverage the junior will have in the negotiations. Moreover, the junior (unlike majors) will probably have the best negotiating position at the beginning of discussions with the major or a third party that is willing to buy a royalty or streaming. In fact, this is likely to be the only time the junior will have any negotiating leverage. When it comes to negotiating joint venture agreements with majors, such agreements should not have ‘agreement to agree’ provisions, as it may prove to be hard for juniors to negotiate at a fair level with majors once the project progresses. Throughout the joint venture agreement or an option agreement, be it during the earn-in stage, development or an expansion, the last thing a junior would want is for the major to be able to slowdown, stop investing and lose interest while still holding on to the mineral property. Majors have many projects. Their investment priorities may change quickly, and exploration and development funds once dedicated to the joint venture can go elsewhere. The slowdown of the major may mean death for the junior. It is common to see juniors that hold only one or few properties, so the junior wants to ensure that money is spent on the ground and good information is generated, as soon as possible, to add value to the property and to its shareholders. From a junior’s perspective, the joint venture agreement or option agreement should establish fixed periods for the major to reach certain thresholds, such as the definition

46 © Law Business Research 2019 Selected Commercial Mining Agreements of a resource, preparation of scoping studies, pre-feasibility and feasibility studies, and construction and production decisions. Another commonly seen feature is for the joint venture agreement or option agreement to allow the major to make cash payments to the junior to extend deadlines for the fixed periods, in order to preserve its options rights or interest over the property. If payments are set at the right values, this should have the effect of keeping the major on track, while meeting the immediate cash expectations of the junior’s shareholders.

Civil law versus common law concerns Transactions in the mining sector are usually cross-border. Although many mining companies and sources of capital come from countries such as the United States, Canada or the United Kingdom, which are traditional common law jurisdictions, the mineral properties to be invested in may be located in other common law or civil law jurisdictions. This may present more challenges than expected from a legal standpoint. Many international mining companies adopt the approach of having standardised agreements to be used in different jurisdictions, to facilitate business. However, the par- ticularities of the local legal system and legislation must be considered, especially when entering into a joint venture agreement or an option agreement in a civil law jurisdiction.4 Even in cases where the mineral property is located in a civil law jurisdiction but the contracting entities are originally from a common law jurisdiction, the implications of local legislation and the civil law system need to be taken into account. Drafting a joint venture agreement or an option agreement from a foreign law template, and simply stating that the agreement is governed by local law and subject to the jurisdiction of local courts, may not be good enough to address the matter. Considering that in a joint venture agreement or an option agreement the specific purpose company will probably be local, and the mining property will also be in the hosting country, it is very likely that the enforcement of rights and obligations will have to take place in the hosting country. Having concepts of foreign law interpreted and enforced in the hosting country can be challenging and in some cases even ruled invalid, especially if the legal systems are different. One example of a common law jurisdiction concept that may not be applicable in some civil law jurisdictions is the case of negotiations in good faith. Canadian courts have held that there is no general duty to negotiate in good faith at common law, unless explicitly provided for in an agreement.5 Conversely, some civil law legislation requires that all negotiations and agreements be done in good faith, and this duty can be considered in court. Even where the legislation may not exist, in civil law jurisdictions the parties may resort to general principles of law, and good faith would be considered one of those. In addition, the nature of certain rights – be they commercial or corporate, such as in a joint venture, or concession-based mineral rights, as in an option or royalty agreement

4 There are different types of civil law systems, depending on its origin (Roman, German or French) and how it has developed. 5 As reported by Fred R Pletcher in the paper Understanding North American Joint Venture and Option Agreements, presented at the 17th SEERIL Biennial Conference of the International Bar Association in 2008.

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– may change dramatically from common law to civil law systems. Further, legislation may supersede and prevail over certain contractual provisions in civil law jurisdictions, such as in those matters considered as public interest. Understanding those differences and the potential issues they may pose to enforcing contractual provisions in court is essential for certainty of contract, and ultimately for reducing the risks in a mining project. Likewise, having those matters properly addressed in the agreements that deal with the interests of the parties, and ensuring that the contractual provisions are adequate regarding the applicable legal system, will reduce room for contractual disputes.

Conclusion This chapter presented some mining agreements that are largely used in the sector, with an emphasis on the specific features of each agreement that are inherent to the mining business. The risk element and the long-term funding needs that comprise exploration, development and construction until production starts, require structures that are unique to mining, and in relation to which mining lawyers need to have a comprehensive approach. The most relevant issues involving joint venture agreements in mining, option agreements, and royalty and streaming agreements were reviewed here. In addition, some concerns that are usually overlooked were addressed, such as considering the nature of the parties involved in typical mining transactions – for example, junior companies and major companies – and the cross-border nature of various agreements, which requires that the differences between the common law and the civil law systems be accounted for in the negotiation and execution of such agreements.

48 © Law Business Research 2019 5

Battery Minerals – A View on Lithium Brine Projects in Latin America

Florencia Heredia and Juan Martín Allende1

This chapter on battery minerals focuses on lithium. It will cover the lithium industry, and also address battery production and the challenges ahead. Initiatives such as the Global Battery Alliance (GBA), and others of the sort, will play a role. The purpose of this chapter is to address the market trends and legal aspects related to battery minerals, which comprise a new category of minerals that can potentially change the mining industry and life in modern and future times. This being intimately linked to the evolution of the electric vehicle (EV) industry, this chapter covers an evolving topic that will see many updates. We are dealing with an unknown and unpredictable market, especially considering that new technologies or discoveries can play a crucial role in the development of EV innovation. Legal aspects related to regulation on the extraction of these minerals and the development of these projects will need to be carefully addressed, and much will depend on the kind of deposit that is dealt with: either hard rock or brine in the case of lithium projects. Equally essential, the issues associated with social licence and sustainable development will have a critical impact, since much of the foreseeable regulation will be related to environmental care and water use. As an example of current trends, in September 2017, the GBA was launched by businesses, international organisations and non-governmental organisations as parties joining efforts to ‘end child labour, hazardous working conditions, pollution and the environmental damage behind the booming trade in batteries for smartphones, gadgets, electric vehicles and renewable energy storage systems in households and cities.’2

1 Florencia Heredia and Juan Martín Allende are partners at Allende & Brea. The authors would like to specially thank the valuable contribution of associate Valentina Surraco Urtubey for the research and assistance with this article. 2 WEF (2017).

49 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America

Initiatives of this sort that address the traceability of the product will also play a relevant role in completing the picture of this industry.

What’s in a lithium-ion battery? Lithium appears as a first choice in battery production, for being the lightest metal and an excellent conductor of electricity and heat. There are a number of alternatives to lithium-ion (li-ion) technologies, such as the use of hydrogen fuel cells. Still, those are in a very early stage of development for being economically viable. Owing to this, the battery of the near future will be a type of li-ion battery technology – what may differ will be the use of different blends of raw minerals. However, analysts insist that lithium will remain a constant. Batteries come in all shapes and sizes, and depending on the type of battery, the minerals that compose them are mainly lithium, cobalt, graphite, nickel and manganese. Currently, a li-ion battery consists of an anode electrode (negative charge), a cathode electrode (positive charge), a separator and liquid electrolyte. The assembly of such four components constitutes a cell, and a collection of one or more cells constitutes a battery. When a battery discharges, electric energy is released through the movement of electrons from negative to positive, and lithium ions move from the anode to the cathode. When it charges, the process is the inverse. In the case of EVs, a certain number of batteries are assembled into a module and, subsequently, a certain number of modules are then assembled into a battery pack. In 2017, demand from batteries production for lithium accounted for 46 per cent of the global demand for lithium, in comparison with 7 per cent from 1992.3 Cathode composition is the main differentiating factor between li-ion batteries. There are currently five li-ion battery technologies fighting to be the main choice for battery makers. Each of these technologies uses different combinations of raw materials, lithium being the only common denominator mineral between them all. Additionally, all of these types of battery chemistry utilise lithium ions as charge carriers between the anode and the cathode – graphite generally being the choice for the anode. Solid-state batteries, such as the solid-state li-ion battery, where the electrolyte is solid rather than liquid, appears as another feasible future technology. The following cathode chemistry ratios are the basis for every producer’s cathode ‘recipe’ or ‘formulations’: • lithium cobalt oxide: used extensively in portable electronics. However, it is not used in EV applications; • lithium nickel manganese cobalt (NMC): this chemistry takes several forms, such as NMC 111 (the simplest, based on an equal amount of the three elements’ atoms), NMC 532/622 typically used by most car makers in EVs, and the most recent and advanced NMC 811 (with the highest theoretical performance still thought to be many years away); • lithium nickel cobalt aluminium: it has a good energy density and an affordable price, making it ideal for EVs and portable electronics;

3 US Geological Survey (2018).

50 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America

• lithium iron phosphate: intrinsically safer than other cathode chemistries. Its high-power density makes it an ideal candidate for electric tools and e-buses, and a good option for EVs; and • lithium manganese oxide (LMO): used in the first EVs, such as the Nissan Leaf, because of its high reliability and relatively low cost. LMO’s downside is a low cell durability compared to other competing technologies.

Therefore, in most batteries, the critical metals include lithium, graphite, cobalt and nickel. Lithium has been the focus in recent years; however, these other commodities are also integral to the battery’s composition, and its development will also be key in the EVs market trends.

The rise of EVs In Paris, on 12 December 2015, as part of the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change, and further to the Kyoto Protocol, all major nations undertook the commitment to fight against climate change through combined efforts and execution of domestic actions for the mitigation of greenhouse gases. The objective was, and still is, to hold the increase in the global average temperature to well below 2°C above pre-industrial levels, and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. As a result of the general consensus regarding climate change as a common concern of humankind, countries and individuals are increasingly demanding greenhouse emission-free products and services, ultimately leading the way to the rise of electro-mobility. As the Fourth Industrial Revolution4 builds, the energy storage revolution has rapidly started to take off. Rechargeable batteries appear as the backbone or ‘holy grail’ towards a clean energy and low-carbon emission economy. EVs, energy storage systems (ESS), smartphones and home ESS have been exponentially increasing battery demand for the past few years. That notwithstanding, the biggest demand for batteries comes from EVs. The EV revolution has been fostered by different governmental incentives such as China’s vehicle subsidy programme, or the widespread ban on internal combustion engine vehicles (ICEVs). In this regard, countries such as France, India, China, Ireland, the Netherlands, Slovenia, Sweden, the United Kingdom and Norway have in place EV deployment targets, and have pledged their intention to end sales or registrations of new ICEVs by 2030 to 2040. According to analysts, the li-ion market faces two types of disruptions: (i) how many EVs will be sold and when the market penetration will take place; and (ii) what battery

4 A term coined by Klaus Schwab, founder and executive chairman of the World Economic Forum. As he wrote in Foreign Affairs magazine: ‘There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact. The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.’

51 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America chemistry will be used for the production of its batteries. By 2030, 28 per cent of all new car sales, and 33 per cent of the global fleet will be electric.5 Nowadays, EVs account for less than 2 per cent of the global car fleet.6 While lithium forecast analysts discuss whether the demand for lithium will increase by triple, quadruple or sextuple in the prox- imate future, the demand will reach unprecedented levels. The EV demand has already led to sizeable changes in the spot prices of lithium and cobalt over the past two years; as of January 2018, a 250 per cent increase for cobalt, and a 400 per cent increase for lithium since January 2015.7As a reference, a Tesla Model 3 uses about 38 kilogrammes of lithium,8 which is enough to power approximately 5,000 smartphone batteries. There is uncertainty, however, as to whether the lithium market will be able to meet the demand in the short term, considering the current investment and the time it takes to install and operate a production plant. Notwithstanding the uncertainties that could still exist and that these figures and trends are a moving target, as of today, with the emergence of electrification in the generation, storage and usage of energy, EVs and energy storage are key market drivers for lithium – and the role of China in these market drivers will be of the essence.9 In addition, and to complete the picture, global car manufacturers continue to expand on their EV strategies with significant levels of committed investments in building capacity.10

5 Bloomberg, NEF (2018). 6 ibid. 7 Facada (2018). 8 According to estimates from SQM. 9 In accordance with China Association of Automobile Manufacturers, in 2017, the production and sales of new energy vehicles (NEV) reached 794,000 and 777,000 units respectively, increasing by 53.8 per cent and 53.3% per cent year on year. In 2018, the market share of NEVs reached 2.7 per cent – 0.9 per cent higher than that of last year. A 20 per cent NEV penetration by 2025 is expected. Global EV penetration rates are mainly fostered by policies in China at a national, regional and municipal level. In this regard, China’s NEV credit policy appears as possibly the most important globally. Such policy put in place a system that acts as an EV quota that requires car manufacturers to generate credits through the sale of EVs. When not reaching the mandatory quota, car manufacturers are obliged to buy credits from competitors. Chinese governmental policies especially incentivise auto original equipment manufacturers for longer range vehicles with higher energy densities, which ultimately signifies higher lithium concentrations per vehicle. 10 These global car manufacturers include, inter alia: (i) Toyota, with 10 new battery electric vehicles (BEV) worldwide in the ‘early 2020s’ and 5.5 million electrified vehicles by 2030, and US$13.3 billion of investment in electric vehicles and battery research and development by 2030; (ii) Volkswagen, with 16 global plants by the end of 2022 for battery and vehicle assembly, an annual production of 3 million EVs by 2025 and battery demand of 150 gigawatt hours per year, and over €50 billion investment into electro -mobility by 2022; (iii) Tesla, with a first-quarter production of 34,494 vehicles, and targeted delivery of 100,000 Model S and Xs in 2018; (iv) BMW, with 25 new EVs by 2025, including 12 BEVs with BEVs to offer ranges of up to 700 kilometres, and US$8.6 billion investment in 2018 into research and development, including e-mobility and autonomous driving technology; (v) Mercedez-Benz, with plans to invest more than US$12 billion in electric and hybrid technology development; (vi) GM, targeting 20 all-electric models by 2023, and annual sales of 1 million EVs by 2026; and (vii) Ford, with US$11 billion of investment into EVs in the next five years, with 40 EV models to debut by 2022.

52 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America

Lithium extraction With the chemical symbol Li and an atomic number of 3, lithium is the first metal in the periodic table. With a specific gravity of 0.534, it is about half as dense as water and the lightest of all metals. In its pure elemental form, it is a soft and silvery-white metal. It was first recognised as an element by Swedish chemist Johan August Arfwedson in 1817, though it was only in the early 1970s that English scientist Michael Stanley Whittingham began to study its use in batteries. Mr Whittingham, then hired by ExxonMobil, invented a rechargeable battery that could be used, but did not become commercially available. Later, American physicist John Goodenough contributed to Sony’s introduction of the first rechargeable lithium battery in 1991. Around 2007 the use of li-ion batteries became mainstream. Different chemical compounds derive from the lithium mineral, the main ones for battery use being lithium carbonate, lithium hydroxide and chloride (generally obtained from the first), and metallic lithium. Lithium carbonate is usually the first step to the rest of the chemical compounds. Nowadays, lithium producers sell mainly lithium carbonate; however, this is shifting towards lithium hydroxide as it is expected that it will out- pace lithium carbonate in terms of demand growth. Traditionally, lithium carbonate can derive from two processes: (i) hard-rock mining extraction where lithium is extracted form granitic pegmatites that contain minerals such as spodumene, which have the largest concentrations of lithium found in igneous rocks; and (ii) extraction from brine, by pumping lithium rich brines to the surface, followed by concentration by evaporation in a series of solar evaporation ponds. The first process is found in Australian11 projects, whereas the second takes place mainly in Chile and Argentina, and countries such as Bolivia, China, Russia and the US state of Nevada. Pegmatite is extracted from open pit systems using traditional mining techniques. The crushed ore is further milled to produce a finer product. The various other minerals, including quartz, feldspar and micas, are then removed. This process results in the formation of a spodumene concentrate, which can be chemically processed to create lithium carbonate or lithium hydroxide. As a general rule, extraction from brine remains the easier and most cost-effective process to obtain lithium carbonate. The majority of global lithium production comes from lithium brine deposits in the south Andean region. The ‘lithium triangle’ or ‘Saudi Arabia of lithium’, as it is commonly referred to, comprises a region of the Andes mountains – the Puna region – that includes parts of Argentina, Chile and Bolivia.

11 Greenbushes in Western Australia holds the biggest spodumene mine and largest active lithium mine in the world. The second- and third- largest sources of spodumene are found in Pilbara, Western Australia, and Kings Mountain, North Carolina, respectively. A number of start-ups have begun mining spodumene in Mt Cattlin and Mt Marion, Western Australia, and in Quebec, Canada. There are also exploration projects taking place in the Pilgangoora, Wodgina and Goldfields regions of Western Australia. Before the brine extraction took the spotlight in the lithium production world, Australia was the majority lithium producer worldwide. Experience in lithium exploitation comes with the expertise of the lithium industry, which sometimes seems underestimated in the current frantic lithium craze.

53 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America

A salar is a natural deposit of different types of salts and sediments that has originated under extreme conditions of aridity. Owing to their location and geological, cli- matic and environmental characteristics, salars hold extremely fragile and dynamic ecosystems. The brine extraction process must meet specific conservation methodologies to avoid the alteration or corruption of the hydrological and geochemistry environment and ecosystem altogether. Environmental and socially responsible practices are needed to earn more than just a formal approval from the authorities and regulators. Transparent and responsible practices are also required to earn and maintain community support and approval – the social licence to operate. In this regard, indigenous communities’ consultation is a relevant part of the approval process for any lithium project in the salars of the Puna region. In Argentina, indigenous communities are largely present in the surroundings of many salars and represent one of the main stakeholders when obtaining the social licence to operate.

Water use Hydrological and geochemistry balance The use of water is a critical feature for the development and operation of lithium projects. The extraction of lithium requires considerable amounts of water, specifically brine, which is drained from the surface and underground in order to fill the evaporation ponds where the mineral remains. Still, research and analysis on water reserves and the hydrogeology of the salars must take place and continue to be developed by governmental authorities in the region. South American brine-bearing states have only recently started to understand and measure the implication that brine extraction has on water. In this regard, lack of data and management models are the first concern. Chile, as a mining-driven country, in the knowledge of the importance of resource conservation, has recently announced12 its intention to enact water regulations that will have a significant impact on the Atacama Salar where Albemarle and Sociedad Química y Minera (SQM) operate. Furthermore, new technologies for lithium extraction from brine are also being researched and developed. Certain companies claim to have developed different processes in which lithium is directly extracted from the brine without the need for evaporation ponds. None of these technologies are yet in place at the production stage, and are not likely to be in the near future; however, if proven to be successful and if deployed in good time, it could substantially lower the environmental impact. Most of the salars in Chile and Argentina currently behave like a closed basin, where the scarce supply of surface and underground water has no outlet but through evaporation. Salinity grade is defined by the combination of freshwaters that recharge the aquifer zone of a salar and its discharge, which occurs mainly through evaporation. The preservation of this type of environment is impacted by human activity. Consequently, it becomes essential to study, understand and measure the hydrology, hydrogeology and geochemistry of each salar and its aquifers, especially the source of the waters that recharge such,

12 Reuters (2018).

54 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America and the rate at which this occurs. This understanding will help to set any adequate brine extraction rates in order to achieve a sustainable exploitation of these ecosystems. In order to adequately manage the water resources of salar ecosystems, it is important to have a detailed understanding of their hydrology, hydrogeology and geochemistry. In particular, it is important to determine the origins of the waters that feed these ecosystems. This will permit the delineation of environmental protection zones, definition of maximum freshwater and brine extraction rates, and the establishment of thresholds to proactively trigger defensive actions to maintain these ecosystems.13 Environmental authorities require the submission of the water extraction volumes for each lithium project, informing about its implication on the hydrological balance. This notwithstanding, the hydrological and geochemistry balance in Andean salars is extremely complex, data is relatively low and studies have not yet been thoroughly conducted. Numerous studies must take place to have a certain idea of the implication of the brine extraction process in the region. Additionally, in many areas, a number of lagoons are located in the salars near the boundary of the peripheral zone. Usually, these ecosystems have a high ecological value and should also be encompassed within the studies and understanding of the hydrology of each salar.14

The Ramsar Convention The Ramsar Convention (the Convention), adopted in 1971 and in force as of 1975, was negotiated during the 1960s by countries and non-governmental organisations concerned about the degradation and maintenance of wetlands ecosystems originally for waterbirds. It is the oldest of the modern global intergovernmental environmental agreements. The Convention today counts over 160 countries as contracting parties, and deals with the management of wetlands as a global matter. The definition of wetlands as used by the Convention is very broad and includes all lakes, rivers, underground aquifers, swamps and marshes, wet grasslands, peatlands, oases, estuaries, deltas and tidal flats, mangroves, coastal areas, coral reefs and all human-made sites such as fish ponds, rice fields, reservoirs and salt pans. The interaction of these protected areas or sites – which relate to many countries with economic development and, in particular, with extractive industries development – is another challenge to be faced by the projects. Argentina ratified the Convention in 1991 and it came into force in 1992. At the moment, there are 23 Ramsar sites identified by Argentina as internationally relevant wetlands. There are currently more wetlands in unforeseen areas being identified to be included in Argentina’s list. Mining authorities, both at national and local level, would be jointly working in connection with this matter in order to harmonise current and potential mining activities in the Ramsar sites to achieve the goals of the Convention and entail the development of mining projects.

13 C Ortiz, et al (2014). 14 Kampf, et al (2005).

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Consequently, and also from the perspective of companies, the implication of the Convention with mining activities in salars is something that should not go unnoticed in the future. Many salars are located within wetlands declared to be of international importance under said Convention. The main goal of the Convention is to establish the List of Wetlands of International Importance (the List) and implement mechanisms to ensure their protection. Wetlands in these sites harbour fauna of great importance such as vicuñas, guanacos, flamingos, taguas and chinchillas, some of them being or having been endangered species. All lithium triangle states have ratified the Convention. This notwithstanding, such an instrument is quite vague and lax when setting forth commitments to the state towards the protection of wetlands, and does not include specific prohibitions such as draining or pumping in listed wetlands. Some salar-located sites are qualified in the List as a highly vulnerable and fragile ecosystems threatened ‘by overgrazing, unregulated tourism, mining prospecting and flamingo egg collection’. There are currently no provisions arising from the Convention that would prohibit mining activities. However, a specific and case-by-case analysis of each salar in which the Convention may apply needs to take place.

Indigenous peoples Indigenous peoples’ rights have become a matter of agenda in many countries in the world. Specifically in Latin America there has been an interesting evolution of legal concepts related to this matter as of the 1980s. It has been mainly owing to the United Nations approach and conferences that the issues related to indigenous peoples and rights started to gain a place in the agenda of many countries. The first real issues around the protection of these rights were related to three main areas: acknowledgement and access to land, traditional knowledge and intellectual property issues, and participation in the extraction of natural resources. One of the main pieces of international legislation ruling the rights of indigenous peoples and communities is the Convention concerning Indigenous and Tribal Peoples in Independent Countries (ILO 169) adopted in 1989, in force in 1991 and ratified by 20 countries, including Bolivia (1991), Colombia (1991), Paraguay (1993), Peru (1994), Ecuador (1998), Argentina (2000), Brazil (2002), Venezuela (2002) and Chile (2008). Canada and the United States have not ratified ILO 169. Article 6 of ILO 169 expressly establishes the following:

1. In applying the provisions of this Convention, governments shall: (i) c onsult the peoples concerned, through appropriate procedures and in particular through their representative institutions, whenever consideration is being given to legislative or administrative measures which may affect them directly; (ii) es tablish means by which these peoples can freely participate, to at least the same extent as other sectors of the population, at all levels of decision-making in elec- tive institutions and administrative and other bodies responsible for policies and programmes which concern them; and

56 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America

(iii) establish means for the full development of these peoples’ own institutions and initiatives, and in appropriate cases provide the resources necessary for this purpose. 2. T he consultations carried out in application of this Convention shall be undertaken, in good faith and in a form appropriate to the circumstances, with the objective of achieving agreement or consent to the proposed measures.

Intimately related to the above is the concept of free, prior and informed consent (FPIC), which makes its way in Latin American legislation and trends through ILO 169, and is now part of the relevant topics considered by stakeholders in the mining, and oil and gas sectors. However, there is no agreed or unanimous consensus on the term and scope of FIPC, or the mechanism for its implementation – the concept of ‘consent’ being the most controversial. The real question is whether the need for consent leads to the indigenous peoples’ right to veto the development of a project. In other words, whether consent is construed by means of a procedure and consultation process, or as a right with the power to issue a decision that may also include the veto to the project. This right would derive from the self-determination substantive right granted to indigenous peoples in several international instruments. In this regard, the extraction of natural resources in Latin America has been challenged in recent years by indigenous communities’ rights and consultation procedures, or, to be more precise, by the lack of regulation that would allow for the principles of the Convention to take place. In the Puna region in the north of Chile and Argentina, where lithium is extracted, specifically in the provinces of Salta and Jujuy of Argentina, indigenous representatives expressed concern about the amount of water consumed by mining companies, and the fear that this could have a disastrous effect on water levels in the area. Another major concern is the pollution caused by mining or oil exploration activities, which in past decades have been carried out without proper environmental controls. ‘We don’t eat batteries. Without water there is no life,’ is a frequent claim made by indigenous communities heard on and surrounding salars. Relevant to this quote is the case of Comunidad Aborigen de Santuario Tres Pozos y otros v Jujuy, Provincia de y otros s/ amparo, which relates to this specific matter. On 20 November 2010, 33 communities brought a lawsuit before the National Supreme Court of Argentina (CSJN) in order to correct the omissions incurred by the provinces of Jujuy and Salta, and the national government, by ordering them to take measures to ensure that indigenous communities could exercise their rights of participation and consultation, and therefore express their FPIC on programmes for the exploration or exploitation of natural resources in their territories. Indigenous communities sought to enforce their rights in every administrative proceeding under which permits for exploration and exploitation of lithium and borates in the areas of Salinas Grandes and Guayatayoc lagoon were granted, owing to the lack of prior consultation and participation of the communities. They also requested the issuance of an injunction, ordering the authorities to refrain from granting any administrative permit in the area, as well as the suspension of those permits already granted.

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The CSJN rejected the claim on 18 December 2012, based on formal arguments, but did not rule on the merits of the case. The indigenous communities indicated that they would continue pursuing their claim before the Inter-American Court of Human Rights; to the best of our knowledge this has not yet taken place. Another aspect to consider in connection with indigenous peoples’ involvement with lithium projects is related to the protection of archaeological and palaeontological heritage. In this regard, the lithium project owned by the Chinese company Ganfeng in the vicinity of the Llullaillaco archaeological site is relevant. As in other countries with mining operations (eg, Australia and Canada), the interaction with indigenous communities will have to be further considered in the Puna region with the development of lithium projects, since such communities are one of the main stakeholders involved in the social licence process. It is expected that, with all the more comprehensive sustainable policies that mining companies have nowadays, this interaction will become the norm, and the interests of communities and companies can be aligned and developed.

The lithium triangle Chile According to the US Geological Survey (USGS),15 Chile holds the largest worldwide reserve of lithium with 7.5 million tons, and the third-biggest resource with 8.4 million tons. There are two type of salars in the South American region: Andean and pre-Andean. The latter have the highest lithium concentration levels, the most important ones in Chile being Atacama, Punta Negra, Pedernales and Maricunga. Currently, the Atacama Salar is the only one in operation, being by far the most important, with most of the Chilean lithium reserves located there. Since 1976, lithium has been considered a ‘strategic resource’ for being a mineral of nuclear importance. Since then, no mining concessions have been (and are) granted for the exploitation of lithium, with the exception of those mining concessions constituted prior to the corresponding declaration of non-concession, or of importance for national security. Such is the case of Production Development Corporation (CORFO), whose concession is located in the Atacama Salar and Corporación Nacional del Cobre de Chile in the salars of Pedernales and Maricunga. In accordance with article 19, subsection 24 of the Constitution of Chile, and article 8 of the Mining Code, the exploration or exploitation, or both, of substances qualified as non-susceptible to mining concessions can only be executed directly by the state or by its companies, or by means of administrative concessions or special operating contracts. In public-private partnerships the state plays the part of the controller under the conditions that the President of Chile establishes by decree. Such is the case with CORFO. In 1984, CORFO invited bids for the development of a portion of the Atacama Salar. After Amax’s successful bidding and further withdrawal, it was acquired by SQM, a major lithium producer. SQM came into production at the salar in 1997. Nowadays, two

15 US Geological Survey (2018).

58 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America companies are in production in said salar after entering into agreements with CORFO: SQM and Albamarle (formerly Rockwood). Said agreements, as amended, were criticised for putting in place weak environmental requirements and insufficient monitoring standards, and for creating a virtual lithium monopoly for SQM. Under such, SQM was to retain lithium extraction rights until 2022. In 2013, President Piñera’s administration filed a lawsuit against SQM for serious breach of contract, which led to a long arbitration process that ended in 2018 with the execution of an amendment agreement entered into by and between CORFO, SQM and Albamarle. The amended agreement raises SQM’s lithium extraction quota to 350,000 tons, to be in force until 2030,16 establishing higher standards of compliance with environmental obligations, and higher royalties and contributions. It now remains to be seen how this amended agreement will evolve, which has already received much criticism. In line with the above, lithium exploitation in Chile has brought up serious environmental concerns. SQM, being the only mining chemical company operating in salars for many years, has needed to substantially update and improve the environmental controls and standards in recent years in order to comply with current sustainable practices. At the end of January of 2017, SQM submitted an environmental compliance plan, in which it proposed to execute works valued at US$18 million, within the framework of a proceeding initiated against the company. Special consideration should also be given to the recent 24 per cent holding purchase in SQM by Tianqi Lithium. Such stake was sold by Canadian fertiliser producer Nutrien, obliged by Chinese and Indian regulators after a prior merger. The deal led to an agreement between Chilean antitrust authorities and Tianqi, which established certain conditions in relation to the appointment of SQM authorities and access to sensitive information. SQM’s controlling shareholders opposed said agreement, filing an appeal before the Constitutional Court of Chile, which was ultimately denied. It remains to be seen how Tianqi’s entrance into one of the biggest lithium projects will unfold in the future, and its implications for the lithium market. Regarding indigenous peoples in Chile, the current exploitation in the Atacama Salar is in the Atacama La Grande Indigenous Development Area. This territory has been claimed as its own by the Atacameño people, who say they have always occupied and inhabited the salar and its basin. Chile definitively has a key role in the global lithium industry development, and SQM is one of the very few companies – together with FMC and Albermarle – that has the technical knowledge to operate brine projects. Now consolidating more operations in Australia with new project acquisitions, the role of this country as a leader in the sector is secured.

Argentina According to USGS,17 Argentina’s lithium resources could be the largest worldwide with 9.8 million tons, and with 2 million tons in reserves. Salars in Argentina are distributed in

16 Previously the extraction quotas were of 130,000 tons for SQM and Albemarle jointly 17 ibid.

59 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America the provinces of Salta, Jujuy and Catamarca. Currently, there are only two salars in production: Salar de Olaroz (Jujuy) and Salar del Hombre Muerto (Salta and Catamarca).18 Any individual or legal entity with the capacity to legally purchase and own a real estate property may purchase and own a mine. The ownership of a mine is acquired through a legal concession granted for an unlimited time and subject to the compliance of certain maintenance conditions (mainly related to the payment of mining fees and the implementation of an investment plan). The availability of resources has led to a boom of junior exploration companies, which have acquired large extensions of mining properties with potential feasibility. Regarding the future, the question about how many lithium projects can take place in a given region arises. Junior exploration companies have intended to penetrate the sector as ‘real estate’ players, and actually lithium projects depend substantially more on energy supply and infrastructure rather than just holding mining licences on properties in salars. In the next few years, the situation in Argentina will probably change dramatically as some companies will not be in a position to sustain the mining concessions they own (owing to canon payment and investments plan compliance), and mining companies with the capacity to operate projects will dominate the scene. This, of course, will just apply to the few feasible lithium projects that could start operation. Argentina lacks a specific regulation for the development of lithium projects, though provisions of the Mining Code and procedural provincial regulations apply to this mineral and concession granting. Given the specific features of lithium in salars and brines, Argentina is facing a stage of discussing and working towards a regulation that may encompass all the aspects relevant for this mineral and its extraction, especially considering that in certain salars there will be more than just one operator and this will undoubtedly require certain parameters or guidelines to operate (eg, demarcation zones, unitisation or other alternatives). In such discussions, that the country has a federal organisation and that resources belong to the provinces is crucial. In this sense, and apart from specific legal considerations, the main impact on natural resources is the power to rule and decide on the specific policies related to the mining industry, even within the scope of a federal or national resources policy. Likewise, and in the context of a federal country, Argentina will have to address the future regulation of the lithium sector considering the views and needs of the interested provinces, and the national policy articulating the local policies and interests, to develop the industry in a long-term sustainable way. Another aspect to consider and integrate in the discussions will be the role and scope of interaction of the public provincial mining companies, and their potential and current

18 The salars with potential projects to be in development are the following. In construction stage: Caucharí and Rincon; in advanced exploration stage: Salinas Grandes, Caucharí, Pozuelos, Pastos Grandes, Ratones, Diablillos, del Hombre Muerto, Tres Quebradas and Llullaillaco; and in initial exploration stage: Laguna Guayatayoc, Salinas Grandes, Jama, Caucharí, Rincon, Pocitos, Incahuasi, Pular, Arizaro, Pozuelos, Pastos Grandes, Diablillos, del Hombre Muerto, Antofalla, Carachi-Pampa, Rio Grande and Laguna Mulas Muertas.

60 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America participation in lithium projects (eg, in the case of Jujuy, lithium is considered a strategic mineral and this fact has several implications). Environmental protection, reserve and natural reserve areas protection, water resources, and access to economic benefits stand as the highest in the agenda of all communities when perceiving the mining sector, and lithium projects are not an exception.

Bolivia Bolivia has two major lithium reserves located in the Salar de Uyuni and Salar de Coipasa. Since 2009, the Constitution of Bolivia regards natural resources from salars and brine as strategic resources,19 thus reserving to the country its exploitation, industrialisation and commercialisation. Since such legislation was enacted, there have been several efforts to advance onto the management of such resources. In 2008, by means of Decree No. 29496, the state-owned Mining Corporation of Bolivia (COMIBOL) was entrusted with the creation, within its institutional structure, of a body responsible for the industrialisation of the evaporitic resources of the Salar de Uyuni. In compliance with such mandate, by means of Resoultion 3801/2018, the COMIBOL created the National Directorate of Evaporitic Resources, which later changed its name to the National Agency of Evaporitic resources (GNRE). In 2017, the agency was replaced by the Yacimientos Litiferos Bolivianos Corporation,20 which will control the exploitation of lithium throughout the value chain. In 2015, two agreements were executed: a contract for the construction, assembly and commissioning of the potassium salts industrial plant to be implemented in the Salar de Uyuni was entered into by and between GNRE and the Chinese company Camc Engineering Co Ltd Bolivia Branch; and a contract for the final design project of the industrial plant of lithium carbonate was entered into by and between GNRE and German K-Utec. It is a widespread notion that one of the main reasons for the apparent failure of Salar de Uyuni exploitation relates to the absence of clear governmental policies, poor infrastructure and a lack of qualified manpower. Additionally, the extraction process in said salar is much more intricate that the one in Argentine and Chilean salars, as these are located in much lower altitudes and a drier climate, which helps the evaporation process. The lower presence of magnesium and potassium makes it easier as well. Until now, Bolivia has only been able to produce a few tons of industrial-grade lithium.21 Whether the country will be open to investors in a general way and therefore start operations in these salars, remains a question. Should that be the case in the near future, another big international player may arise and have an impact on the supply of lithium.

19 Paragraph II of article 369 of the Constitution of Bolivia establishes: ‘the non-metallic natural resources existing in the salt flats, brine, evaporitic, sulphur and others, are strategic for the country.’ Article 355 of the Constitution establishes that the industrialisation and commercialisation of natural resources shall be a priority of the country, and that the profits obtained from the exploitation and industrialisation of natural resources will be distributed and reinvested to promote economic diversification in the different territorial levels of the country. 20 Bolivian ‘Strategic National Public Company of Bolivian Lithium Deposits’ Act No. 928. 21 The Yacimientos Litiferos Bolivianos Corporation (no date).

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Price In comparison with other minerals and commodities, lithium is not listed in the stock exchange, so the price is the result of the agreements between buyer and seller. Prices are referenced based on such purchase agreements, and importation and exportation prices. The result is high price fluctuation and market uncertainty. Reference prices are based on the lithium carbonate equivalent as it is the most commercialised chemical. The London Metal Exchange has announced it is working on the launch, towards the start of 2019, of new futures contracts covering one, some or all of the following battery minerals: • lithium; • cobalt; • nickel; • graphite; and • manganese.

This would especially impact the lithium and cobalt industry as it would bring more certainty, and further price stabilisation and normalisation. Lithium price assessments services include Argus Media, S&P Global Platts and Benchmark Mineral Intelligence – price data collection and assessment companies specialising in minerals, including the li-ion battery supply chain. Whether the listing of this mineral will change the market trends in any way is still to be seen (it is unlikely) though it will certainly have an impact on junior companies play- ing in the sector.

Cobalt Democratic Republic of the Congo Cobalt production is concentrated in sediment-hosted stratiform copper deposits in Kinshasa, the Democratic Republic of the Congo (DRC). It is the leading source of mined cobalt, supplying more than 50 per cent22 of the world’s cobalt mine production and holding at least half of the world’s reserves. There is almost a 100 per cent chance that your smartphone or EV contains cobalt that comes from child workers in artisanal mines, dug by hand in often risky conditions. Children as young as seven work in cobalt mines. Health and safety compliance is nonexistent and mines frequently collapse, bury- ing people underground. Some have gone so far as saying cobalt is the ‘blood diamond of batteries’. A supply shortage is also a reality, with few producers having the supply control; the price has gone from US$20,000 per metric tonne in 2016 to US$80,000 per metric tonne in 2018.23 The DRC remains one of the poorest and most underdeveloped countries in the world, where over 80 per cent of the inhabitants do not have access to electrical energy. Governmental corruption and the lack of human rights law enforcement is also well known. In 2012, the Organisation for Economic Co-operation and Development (OECD)

22 US Geological Survey (2018). 23 The London Metal Exchange (2018).

62 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America established guidelines for companies sourcing minerals from high-risk areas like the DRC. In accordance with these guidelines, car and battery makers should be able to disclose their supply chain assessments identifying and addressing human rights risks and abuses. In 2017, several companies joined efforts to create the ‘Responsible Cobalt Initiative’ to help the industry conduct due diligence in line with the OECD guidelines, and tackle the issue of child labour in the DRC. Companies include tech firms such as Apple, HP, Huawei, Sony and Samsung SDI, whose smelters purchase cobalt from artisanal mines. No member of this group is as yet a carmaker. In accordance with the Dodd-Frank Act, the United States regulates the use of conflict minerals. China has also issued guidelines for the ethical sourcing of minerals. In the United States, regulated conflict minerals are referred to as ‘3TG’, which are as follows: • columbite-tantalite, also known as coltan (from which tantalum is derived); • cassiterite (tin); • gold; • wolframite (tungsten), or their derivatives; and • any other mineral or its derivatives determined by the US Secretary of State to be financing conflict in the DRC or an adjoining country.

Currently, cobalt is not considered a conflict mineral; therefore, the disclosure obligation does not apply. In 2016, Apple expanded its responsible sourcing efforts beyond conflict minerals to include cobalt, being the first tech company to do so.24 In its last Conflict Minerals Report before the US Securities and Exchange Commission, the company admitted that it cannot say for sure whether materials produced during ‘incidents’ related to the financing of violent conflict ended up being used to make its gadgets. Furthermore, it is worth noting that Tesla has also voluntarily included cobalt in its last Conflict Minerals Report submission, stating it has implemented due diligence procedures for cobalt sourcing so as to ensure it does not come from artisanal mining sites. The above-mentioned tech and carmaker companies are working around the clock to find ways to use less of the metal, expecting to gradually move to batteries that use less cobalt such as NMC 811. How the impact of cobalt supply and its unique place of origin will affect the industry is something to be continuously monitored.

Sustainable development and supply chain Owing to the impact that sustainable trends have in this sector, summarised below are some of the international standards or initiatives that are relevant to the lithium sector.

24 Apple Inc (2017).

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Sustainable Development Goals The 17 Sustainable Development Goals (SDG), agreed by UN members in September 2015, set the global agenda for equitable, socially inclusive and environmentally sustainable economic development up to 2030. SDG No. 12 sets the goal to ‘ensure sustainable consumption and production patterns’ as a call to action to ensure efficient management of natural resources and the way pollutants are disposed of, and guarantee reliability in the areas of human rights, labour (including health and safety) and the environment. As outlined by the 2016 Atlas ‘Mining to the Sustainable Development Goals’ the mining industry has the opportunity and potential to positively contribute to all 17 SDGs. This notwithstanding, in battery minerals mining the following SGDs have a special implication: • SDG No. 6 , ‘Ensure availability and sustainable management of water and sanitation for all’: lithium extracted from brine has special implications for the hydrological and geochemical balance of the region where it is sourced; • SDG No. 15, ‘Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss by ensuring the conservation, restoration and sustainable use of terrestrial and inland freshwater ecosystems and their services, in particular forests, wetlands, mountains and dry lands, in line with obligations under international agreements’; and • SDG No. 8, ‘Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all’: cobalt mining production comes from child workers in artisanal mines in the DRC and indigenous communities.

The analysis and impact of SDGs in the mining sector – especially in the lithium industry – entails a whole separate review, this being just an introductory comment to raise the issue.

Traceability milestones Dodd-Frank Act Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act on conflict minerals paved the way towards the traceability standard. Originally aimed at stopping the funding of the national army and rebel groups in the DRC that illegally used profits obtained from minerals trade, it obliges US-listed companies to identify the origin of the minerals they use and disclose it if it falls within conflict minerals. None of the main battery minerals fall into such definition. However, perhaps the most important contribution of section 1502 was that it obliged companies to carry out a supply chain due diligence.

Extractive Industries Transparency Initiative The Extractive Industries Transparency Initiative (EITI) aims to develop standards that can be voluntarily implemented by countries. The EITI Standard is overseen by the international EITI Board, with members from governments, companies and investors, and civil society, meaning it is a multi-stakeholder process. Alongside the publication of payment and revenue data, the Standard also provides for comprehensive transparency concerning production data and other aspects of the extractive industries: ‘A recent report

64 © Law Business Research 2019 Battery Minerals – A View on Lithium Brine Projects in Latin America by the Open Government Partnership noted that joining the EITI is the most frequent commitment countries make to improve transparency of revenue and related information around the “value chain” as described under this standard.’25

Battery minerals initiatives GBA The GBA was launched as a global public-private partnership to support the development of an inclusive, sustainable and innovative battery value chain, focusing primarily in lithium, cobalt and graphite. Three areas of work are identified: to support the development of a responsible, sustainable and stable supply of critical raw materials for batteries; to accelerate the move toward a circular economy for batteries; and to help inform sustainable social, environmental and product innovation along the value chain. Its main functions are generating, mapping and pooling information, fostering dialogue along the value chain and providing a systemic approach to local challenges. Regarding lithium and cobalt minerals, coalitions are being assessed to take action for a responsible, stable and sustainable supply of such minerals.

European Battery Alliance With a commercial backbone, the European Battery Alliance presents itself as an initiative seeking to establish a competitive manufacturing value chain in Europe with sustainable battery cells at its core.

Conclusion It is expected that demand for lithium, and other related battery minerals, will continue to grow, but to what extent and degree remains to be seen. Battery minerals open a new sector in the mining industry, sharing some of the issues and challenges that mining has always had – though also interacting with new aspects such as technology and innovation – and intimately linked to the demand of EVs and their increase worldwide (mostly in China). Hydrogeological aspects and technical expertise, as well as communities’ interests in connection with mining, and areas of influence of the specific projects, play a key role in the development of lithium projects. As known in the mining industry, effective benefits, which include basic infrastructure and, in general terms, the improvement of the living conditions of the communities impacted by mining projects, could help to erase much of the grounds for potential conflict. In this regard, and especially considering many technical aspects that relate to the operation of salars, in order to assure environmental protection and balance of hydrogeological conditions, as well as communities’ concerns, an integral analysis should be made. Guidelines and parameters to operate in salars, mainly from an environmental perspective, should be analysed considering the features of each salar and project. Sustainable initiatives to set the standards for battery minerals development will continue to evolve, and also show a way forward in the industry.

25 Bastida (2018), p. 4.

65 © Law Business Research 2019 6

Tax Stability in the Mining Industry

Juan Pablo Menna and Agustina de Abaroa1

This chapter will focus on the tax stability benefit for the mining industry in Argentina in comparison with other jurisdictions. Despite political and social instability, mining activities in South America have increased during the past few years, and the trend for the coming years seems to be positive in view of the rise in commodity prices, especially those of metals. Specifically, Argentina has achieved in recent years a user-friendly investment regime and, along with its promising geological conditions, the country has become a popular destination for mineral investors. Indeed, the mining activity in Argentina has grown in the past few years, being nowadays one of the most important industrial activities in the country. Nonetheless, in comparison with neighbouring countries, mining activity in Argentina has fallen behind regarding the effects of the activity on the GDP.2 Based on certain statistics,3 approximately 75 per cent of Argentine territory with potential mining resources is still unexploited. Therefore, there is an enormous potential for development in mining activity in Argentina. However, mining is a high-risk activity that requires major capital investments and long recovery periods of such investments. According to the projections made by the current administration, large-scale exploitation of gold, silver, copper and lithium in the country would require investments between US$300 million and US$500 million per year.

1 Juan Pablo Menna is a partner and Agustina de Abaroa is an associate at Baker McKenzie. 2 In developing countries like Chile and Peru mining also constitutes 10 per cent of their GDP. However, in countries like Argentina, it amounts to 4 per cent of the GDP. 3 Ameriso C, Benitez E, Gagliardini G, Raffo A, ‘Taxation and Environment in Argentina. Impact of Mining’, https://www.fcecon.unr.edu.ar/web-nueva/sites/default/files/u16/Decimocuartas/ ameriso_y_otros_fiscalidad_y_medio_ambiente_en_argentina.pdf.

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In this regard, the investment environment of mining countries depends essentially on the expected rate of return the country offers to investors and the level of risk associated with the mining projects. Since the aforementioned factors may vary depending on the country’s geological potential, political stability, tax regime and government regulations it is crucial for the investors in the region to have a protection against changes in local regulations that may affect their investments. Therefore, the purpose of this chapter is to analyse the main aspects of the guarantee of tax stability in Argentina. It will also analyse how the tax stability regime works in other jurisdictions of the region, and the aspects to be taken into account so that a guarantee provides the investor a real protection against the frequent changes in such jurisdictions’ regulations.

The Mining Investment Law No. 24,196 Mining activity in Argentina is regulated by the Constitution, the Argentine Mining Code4 and several federal laws, executive orders, resolutions and regulations that apply specifically to this activity. Mining activity is also governed by the local legislation enacted by each of the Argentine provinces. Procedures for obtaining mining rights (exploration permits and exploitation concessions) are mainly regulated by the Argentine Mining Code and the provincial mining procedural codes. Moreover, in Argentina the federal state and the provincial states are the owners of first-category minerals (such as gold, copper, silver and other hard minerals) located in their respective territories. Nevertheless, except for certain specific cases, federal and provincial governments are prevented from exploring and exploiting mining areas, and must grant to private parties the right to search for and exploit mineral resources. In light of this, provincial governments are entitled to enact their own mining legislation. However, such provincial legislation shall not be contrary to federal legislation.5 Pursuant to the Argentine Mining Code, mining rights are mainly divided into exploration permits and exploitation concessions. Since ownership of surface land is not included in these exploration permits and exploitation concessions (apart from certain exceptions), permit and concession holders need to negotiate access agreements with the owner of the surface land. If surface access is unreasonably withheld, the holders may apply for easements.6 In order to promote mining activity and guarantee foreseeability and stability, in 1993, Argentina enacted the Mining Investment Law No. 24,196,7 which contributed to the growth of mining activity in Argentina.

4 Law No. 1,919 – the Argentine Mining Code (http://servicios.infoleg.gob.ar/infolegInternet/ anexos/40000-44999/43797/texact.htm). 5 Baker McKenzie, Latin America Mining Handbook 2016. 6 ibid. 7 Law No. 24,196 – the Mining Investment Law (http://servicios.infoleg.gob.ar/infolegInternet/ anexos/0-4999/594/texact.htm).

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In effect, since the enactment of the Mining Investment Law, mining activity in Argentina has grown rapidly, becoming one of the major industries in the export sector and attracting important investment and infrastructure projects for the country.8 The Mining Investment Law creates an investment regime for persons or entities domiciled in Argentina that develop mining activities. This regime is also applicable for the provinces that decided to adhere to the federal investment regime, and for the municipalities of such provinces. Since the enactment of Law No. 24,196, the main mining provinces have adhered to it, allowing a more suitable legal framework granting tax benefits for the mining industry.9 Additionally, the benefits provided in the Mining Investments Law are as follows: • total tax burden stability for 30 years as from the filing of the feasibility study; • special income tax deduction of all the amounts invested in prospection, exploration and special studies, and mineralogical, metallurgical, pilot plant and applied research essays, and other work intended to determine the technical and economic feasibility of the projects; • tax on personal assets exemption; • accelerated amortisation system for income tax purposes of capital investments incurred in executing new mining projects and expanding the existing ones; • exemption from the payment of customs duties related to the entry of capital goods and special equipment (or components of such assets) determined by the enforcement agency, as required to undertake the activities regulated by this system; • a system to request VAT credits resulting from imports and purchases of goods and services intended for use in mining activities: prospection, exploration, metallurgical essays and applied research; • royalties for the exploitation of the mine requested by the provinces adhering to this regime should not exceed 3 per cent of the value of the mineral extracted at the mining pit; and • the companies provision for environmental expenses may be deducted for income tax purposes.

Tax stability in Argentina Investments in new mining projects and the existing ones that increase their production are protected by Law No. 24,196 and, therefore, benefit from tax stability for a term of 30 years as from the filing of the feasibility study.

8 D’Onofrio, Alejandro C, ‘La situación actual de la estabilidad fiscal y cambiaria en materia minera’. 9 The activities included in the Mining Investments Law are: (i) prospection, exploration, development, preparation and extraction of mineral substances; and (ii) processes of crushing, milling, profitability, pelletisation, sintering, briquetting, primary processing, calcination, smelting, refining, sawing, carving and polishing, provided that these processes are carried out by the same economic unit and regionally integrated with the activities described in (i). Moreover, the Mining Investment Law specifically excludes from this regime the activities related to oil and gas, the industrial process of manufacturing cement from calcination, the industrial process of manufacturing ceramics, and the making of sands and boulder destined for the construction industry.

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Tax stability means that companies’ tax burden, as determined at the time of filing the feasibility study, cannot be increased as a result of changes in federal, provincial or municipal taxes and rates. This regime is applicable to all taxes – except VAT – that are imposed on a beneficiary mining entity, as well as to the duties, tariffs or other taxes on imports or exports. After the feasibility study is filed, the tax authority should issue a certificate with the federal and provincial taxes, as well as the municipal fees applicable at the time of the filing of the study, and should send that certificate to the corresponding tax authorities. Therefore, tax stability in Argentina, unlike other counties, is given once the feasibility study is filed and the tax certificate is issued. Hence, no tax stability agreement is executed. Under this regime, the law guarantees that the qualified company will not be subject, for 30 years, to a total tax burden higher than the one existing at the time of the feasibility study. Section 8 of the Mining Investments Law stipulates that tax stability includes all taxes, such as direct taxes, fees, contributions, and export and import taxes. VAT is excluded from the tax stability clause. The tax stability regime in Argentina is fulfilled provided that the total tax burden is not increased. Consequently, the benefit works as a cap; thus, if taxes are eliminated or reduced, the qualified company will benefit from those changes. In other words, a particular tax may be increased – or a new tax may be created (or both) – but, if the effect of such increase – or new tax – is compensated in that same jurisdiction through the elimination or reduction of other taxes or tax amendments favourable to the taxpayer, the tax stability guarantee will not be affected. The modification of the tax burden refers to the creation of new taxes, the increase of tax rates, the amendment of the tax assessment procedure – such as the elimination of exemptions or deductions, the incorporation of new situations that trigger the tax, the elimination or modification of a regulation that implies the application of taxes to situations that were not taxed at the time of the feasibility study – and the modification of the income tax rate or the tax assessment applicable to foreigner beneficiaries for the interest arising from the loan when the Argentine entity agreed to burden the income tax payment. However, the following situations shall not be covered by the tax stability regime or violate such tax stability: • changes in the valuation of assets, when such valuation forms the base for the tax’s application and assessment; • the extension of regulations applicable for a specific period in force during the filing of the stability study; • the expiration of exemptions applicable for a specific period and that were in force during the filing of the stability study; • the incorporation of a new tax normative that entails further controls and verification mechanisms to avoid the improper reduction of taxes; and • social security contributions.

Tax stability also applies to the regulations and customs duties rates, excluding the reimbursement or refund of taxes that, as export benefits, may be applicable whenever definitive exports are made.

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During recent years, taxpayers have challenged the practical application and extension of the stability regime. In this context, the Argentine Federal Supreme Court (the Supreme Court) has settled its position regarding some controversial issues related to this.

Tax stability The application of equalisation tax Before the Income Tax amendment, published in the Argentine Official Gazette on 29 December 2017,10 a corporate income tax at a rate of 35 per cent11 was imposed on Argentine legal entities and branches, and other permanent establishments doing business in Argentina. An additional 35 per cent withholding tax was applied, after making certain adjustments, to the distributions of profits not subject to the 35 per cent corporate income tax at the corporate level (equalisation tax).12 In this scenario, the mining company Cerro Vanguardia questioned in court the application of the equalisation tax applicable to fiscal year 2000, arguing that such tax was incorporated after obtaining the tax stability and, thus, was not applicable to the taxpayer. Conversely, the federal tax authority alleged that tax stability benefits were only applicable to the entity that requested such regime, but was not extended to the shareholders of Cerro Vanguardia. Therefore, according to the federal tax authority, as equalisation tax was imposed over the profits of the shareholders once dividends were distributed, the stabilisation tax benefit did not apply to these situations. The Federal Tax Court13 and the Court of Appeal rejected the taxpayer’s arguments, confirming the Federal Tax Authority position.14 However, the Supreme Court15 reverted the Court of Appeal sentence and confirmed Cerro Vanguardia’s defence arguments. In its ruling, the Supreme Court highlighted that the tax stability regime’s aim was to give the investors tax stability and foreseeability in order to promote mining activity, which is a high-risk activity with long-term recovery of capital investments. In this context, the Supreme Court informed that the stability regime needs to be given a normative analysis and not one from a literal standpoint. In this context, the Court concluded that the aim of the law is to give the mining investors a stable and foreseeable regime in order to promote its investments in Argentina and, applying an equalisation tax – not legislated when the stability was obtained – to the distribution of dividends would imply a higher tax rate for income tax purposes. In other words, the Supreme Court concluded that the application of the equalisation tax would increase the total tax burden of Cerro Vanguardia and, thus, would be against the stabilisation regime obtained by the taxpayer.

10 Law No. 27,430 (http://servicios.infoleg.gob.ar/infolegInternet/anexos/305000-309999/305262/ norma.htm). 11 As from January 2018, the income tax rate applicable for fiscal years beginning in 2018 and 2019 is 30 per cent, and 25 per cent for fiscal years beginning in 2020. 12 As per the income tax amendment – Law No. 27,430 – equalisation tax is no longer applicable for dividends or profits attributable to income accrued in fiscal years starting from 1 January 2018. 13 Federal Tax Court, Sala A, Cerro Vanguardia c/ AFIP-DGI s/ apelación, 18 August 2004. 14 Court of Appeal, Sala V, Cerro Vanguardia c/ AFIP-DGI s/ apelación, 26 April 2006. 15 Federal Supreme Court, Fallos 332:1531.

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In this leading case, the Supreme Court set aside the corporate principle that separates the entity from its shareholders, and concluded that what prevailed in this case was the tax stability principle regulated in Law No. 24,196. Thus, this important Supreme Court precedent awards stability not only to the corporate entity but also to its shareholders, protecting the real mining investors in order to fulfil the commitment stipulated in the stability regime.16

Taxpayer’s burden of proof A judicial case analysing the tax stability regime applicable to export duties As mentioned, export duties are included within the tax stability regime. Thus, from a legal standpoint, once the tax stability is granted, any increase or creation of new export duties, or both, should not apply to the project that received the stability, as long as such increase entails a higher tax burden applicable for the taxpayer. Export duties are calculated on the tax base described below and at the rate currently in force when the definitive export declaration is filed before the customs office. Export duty tax base is defined by the Customs Code as a theoretical free on board value of a sale between independent parties, and includes the addition of expenses such as commissions and brokerage, among others. If the price was agreed between related parties, the importer shall provide evidence that the price was not influenced by such relation, usually by means of a transfer pricing report. In any case, customs could determine the tax base for customs valuation purposes. The Supreme Court analysed the application of export duties in light of the tax stability regime in the leading case Minera del Altiplano SA. In effect, export duties for certain commodities17 were introduced by Decree No. 310/2002 and the Ministry of Economy’s Resolution No. 11/2202. However, according to the Federal Customs’ General Instruction No. 19/2002, all the exporters benefiting from the tax stability of Law No. 24,196 (section 8) were excluded from the payment of such export duties. Such criterion remained valid until 2007 when the Secretariat of Mining and the Secretariat of Domestic Commerce determined that export duties were also applicable to exporters benefiting from the tax stability of Law No. 24,196, and therefore applicable to the claimant of the case. In such context, Minera del Altiplano SA initiated a judicial pleading – amparo – in order to request the judge to declare that the referred export duties should not apply to it based on the tax stability regime regulated in Law No. 24,196. Although the First Circuit judge18 and Salta’s Federal Court of Appeals19 confirmed the taxpayer’s arguments

16 Mazzinghi, Marcos, Saravia Frías and María Inés, ‘La estabilidad fiscal en la actividad minera y el impuesto de igualación’. 17 Export duties were created for the harmonised tariff codes 2709.00.10, 2709.00.90, 2710.00.11 and 2710.00.99. 18 Minera del Altiplano SA c/ Estado Nacional PEN otra s/ amparo, first instance sentence issued by Salta’s Federal Court, dated 19 February 2008. 19 Minera del Altiplano SA c/ Estado Nacional PEN otra s/ amparo, Salta’s Federal Court of Appeal ruling, dated 6 May 2008.

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– concluding that the export duties increase was not applicable to Minera del Altiplano SA – the Supreme Court, based on the opinion of the Office of the Attorney General20 rejected the taxpayer’s request. The Office of the Attorney General highlighted that the spirit of the stability regime was not to grant the taxpayer an exemption from new taxes or the increasing of existing ones. Indeed, according to the Office of the Attorney General, the aim of the tax stability regime regulated in Law No. 24,196 is to grant tax stability and a cap for the total tax burden applicable at the time of the filing of the feasibility study. Moreover, the leading case emphasised that, according to article 8(5.1) of Law No. 24,196, the beneficiary carries the duty to prove the increasing of the total tax burden and request the reimbursement of the paid tax that generated such increase. In conclusion, the importance of this leading case is that it highlights and confirms two major procedures arising from the tax stability regime: (i) that the beneficiary is bur- dened with the duty to prove the rise of the total tax burden; and (ii) that the proper procedure is to pay the taxes and, afterwards, to request the reimbursement of the tax that infringed the stability regime. Hence, the Supreme Court did not deny the right of the mining company to request compliance with the stability regime, but stressed that the taxpayer should comply with the regulated procedure and prove the infringement of the granted stability regime.21

Tax stability in the region The cases of Chile and Peru Chile In Chile’s history, mining has consistently been a leading industry in the country, namely in copper mining.22 The growing of the mining industry has been supported by a successful government policy to attract foreign investment. Over almost four decades, foreign investment was promoted and protected under the regime created by Decree Law No. 600 of 1974 (DL 600), enacted during the government of Pinochet. DL 600 established a tax stability regime that provided access to the official foreign exchange market, and granted certain benefits to the foreign investors such as the following: • the option of invariable income taxation at a rate of 42 per cent for 20 years; • invariable VAT and customs duties on the import of capital goods; • the option of no variation in the mining tax for 15 years; and • an alternative mechanism of calculating tax costs in a foreign currency.

20 Office of the Attorney General in Minera del Altiplano SA c/ Estado Nacional PEN otra s/ amparo (S.C. M.137, L.XLVI) dated 7 April 2011. 21 Simesen de Bielke, Sergio A, ‘Estabilidad fiscal en la minería: precisiones sobre el alcance de la ley 24.196’. 22 The 1990s marked the beginning of a boom in Chile’s mining industry. During this period, Chile had one of the fastest growing economies in the world, and mining accounted for 8.5 per cent of the GDP and 47 per cent of exports (source: Encyclopedia of the Nations).

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Under DL 600, a foreign investor needed to enter into an agreement with the Chilean government (through the Foreign Investment Committee) every single time it made an investment in the country.23 Indeed, the foreign investors that met the requirements set forth by DL 600 were requested to file an investment petition, which, once approved, was reflected in a foreign investor agreement. As mentioned above, the agreement granted certain guarantees to foreign investors, who were only required to make the investment in the mining project once the agreement was signed with the Foreign Investment Committee and within a term of eight years from the execution of the agreement. Although this procedure created certain layers of bureaucracy and additional costs for investors, the framework of DL 600 allowed foreign investors to make investments in the country under a tax stability scenario, which not only encompassed income tax and VAT but also mining tax and customs duties on the import of capital goods for the development of mining projects. Nonetheless, DL 600 was abrogated as a result of the comprehensive tax reform enacted by Law No. 20,780 in 2014.24 In such a context, on 16 June 2015 the Chilean Federal Congress enacted Law No. 20,848 (the New Regime), which sets forth a new legal framework for foreign direct investments in Chile as from 1 January 2016.25 The New Regime includes a definition of direct foreign investment, which involves any transfer of foreign capital or assets into Chile, owned by a foreign investor or controlled by it, in an amount equal to or higher than US$5 million, through the transfer of freely convertible foreign currency; the contribution of physical assets; the reinvestment of earnings; the capitalisation of credits; or the transfer of technology that may be capi- talised or credits associated with foreign investments from related parties. In addition, the New Regime sets forth certain rights for the foreign investor: (i) to send abroad the transferred capital and the net profits generated by the investment, upon fulfilment of the relevant tax obligations; (ii) access to the banking exchange market to settle or obtain foreign currency; and (iii) not to be discriminated against when compared to domestic investors (ie, guaranteeing foreign investors the same treatment as local investors before the law, such as in tax disputes or expropriation compensations- among other benefits).26

23 Under the context of DL 600, to enjoy the tax stability right – among other benefits – the foreign investor was required to enter into an agreement with the Chilean government, represented by the Foreign Investment Committee, which was responsible for approving the entrance of foreign capital, and establishing the terms and conditions of each foreign investment agreement. 24 Section 9 of Law No. 20,780, enacted on 26 September 2014 and published in the Chilean Official Gazette on 29 September 2014, set forth the abrogation of DL 600 as from 1 January 2016. After such date, the Foreign Investment Committee is not entitled to celebrate new foreign investments agreements. Nonetheless, agreements already executed under DL 600 will continue to apply in accordance with the regime created by it. Source: Chilean Federal Congress Library https://www.leychile.cl/Navegar?idNorma=1067194. 25 The law was published in the Chilean Official Gazette on 25 June 2015. Source: Chilean National Congress Library https://www.leychile.cl/Navegar?idNorma=1078789. 26 Investors can also benefit from a complete exemption of VAT for the import of capital assets so long as these assets are used to exploit developments in the mining, industrial, forestry, energy,

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One of the main advantages of the New Regime is that under the current regulations, foreign investors are entitled to the aforementioned rights without requiring authorisation from any foreign investment regulatory entities. However, the New Regime eliminates certain rights granted under DL 600, such as the opportunity to agree a fixed tax amount over a given term with the Chilean government (eg, including invariable income, the invariable mining tax and the possibility of calculating tax costs in a foreign currency). In this regard, the New Regime specifically sets forth that foreign investors that signed foreign investment agreements with the Chilean government under DL 600 may request a foreign investment authorisation for a term of four years (the transitional period) to preserve all rights and obligations thereun- der, provided that the agreements were signed before 1 January 2016. Under the referred authorisation, foreign investors will enjoy the following rights and have the following obligations during the transitional period: • the right to execute the investment through any of the procedures established by DL 600; • an invariable income tax rate for 10 years, limited to an aggregate rate of 44.45 per cent;27 and • invariable taxation for 15 years for investments allocated to mining projects of a value of US$50,000 or more.

These investors will have the right to invariability – under the rule of law effective from the date of signature of the foreign investment agreement in regard to the specific mining tax – to any new mining taxes, or changes in the amount or form of calculation of mining exploration and exploitation permits. In other words, foreign investors are entitled to choose to enter into the foreign investment contracts set forth in DL 600 – though with limited benefits in form in which the investment can be made and tax invariability – until the end of the transitional period, which will end on 1 January 2020.

Peru Peru is the third-largest producer of copper and silver, and the sixth-largest producer of gold, and also produces considerable amounts of lead, tin, zinc and molybdenum. Under Peruvian legislation, investors in mining projects are entitled to enjoy certain rights and guarantees upon making investments in the country. Regarding the tax stability benefit, current regulations allow investors to protect themselves from changes in Peruvian law by resorting to two kinds of stability agreements: (i) general stability agreements under the general Peruvian legal regime created by Legislative Decree No. 662 (DL 662);28 and (ii) mining stability agreements, which grant tax, exchange control and

infrastructure, telecoms and technology sectors; exceed US$5 million in value; and generate income within 12 months. 27 The maximum tax rate under the Chilean tax law entering into effect in 2017. 28 Legislative Decree No. 662, Peru, 29 August 1991, National Congress, Sections 10–11, 15 and 175, source online: http://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/ED760CA3685D01C C05257CC8006B3A10/$FILE/4_DECRETOS_LEGIS_662_ESTABILIDIDAD_JURIDICA.pdf. DL

74 © Law Business Research 2019 Tax Stability in the Mining Industry administrative stability for a specific mining project to the investor. Mining stability agreements are governed by the Peruvian General Mining Law (GML).29 The general stability agreement is a civil contract that has the force of a law and guarantees continued application of certain laws and regulations in force at the execution date. In order to execute a general stability agreement with the Peruvian government, investors are required to guarantee an investment of no less than US$5 million in any sector, except in mining and hydrocarbons.30 Under the general regime, foreign investors are granted the following guarantees: • stability of the income tax regime (ie, the guarantee of a fixed income tax at corporate level); • free disposal of foreign currency; • free remittance of profits, dividends, capital and other income; • a favourable exchange rate in the market; and • non-discrimination of treatment between foreign and domestic investors.

In order to qualify for the benefit, foreign investors must invest at least US$10 million into a business established in Peru or into high-risk investments in Peru, with the effect of directly generating more than 20 permanent jobs and at least US$2 million of export income within three years following the signing of the general stability agreement. As mentioned above, in addition to general stability agreements, local and foreign investors in mining projects are entitled to execute guarantee agreements and investment promotional measures (mining stability agreements) with the Ministry of Energy and Mining (MINEM), on behalf of the Peruvian government. Similar to general stability agreements, mining stability agreements have the force of law and protect investors from changes in certain regimes, laws and regulations for a 10-, 12- or 15-year term – as from the date of the execution or expansion of the investment – depending on the investment and level of production, as applicable. Companies conducting mining activities that start, or are, carrying out operations above 350 tons per day up to a maximum of 5,000 tons per day, may enter into a 10-year stability agreement. Additionally, companies that undertake an investment commitment of at least US$20 million, may also enter into the stability agreement (the stability regime would be in force as of the date in which the full investment is met). Companies can choose to benefit from the stabilised regime in advance for a maximum period of three years, within which the minimum investment shall be reached. Such advanced term shall be deducted from the 10-year term.31

662 is based on the protection granted by section 63 of the Peruvian National Constitution to foreign investors and ensures the non-discrimination principle, granting foreign investors the same property and intellectual property regulations as national investors. 29 ‘Texto Único Ordenado de la Ley General de Minería’, Decreto Supremo No. 014-92-EM, Peru, 3 June 1992, Congreso de la República, source online: http://www2.congreso.gob.pe/sicr/cendocbib/ con3_uibd.nsf/89E200B65DCF6DE9052578C30077AC47/$FILE/DS_014-92-EM.pdf. 30 For these two specific sectors, the minimum investment required is US$10 million. 31 General Mining Law as amended by section 6 of Law No. 30,230, Peru, 12 July 2014, ProInversíon website, http://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/LEY_30230_12072014/LEY30230. pdf%3E.

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Companies with a starting capacity of over 5,000 tons per day, or with expansion projects underway aimed at reaching a capacity of over 5,000 tons per day, may enter into a 12-year stability agreement. Additionally, companies that undertake an investment commitment of at least US$100 million (for the commencement of the mining activities) or US$250 million (for already existing mining companies carrying out expansion projects) may also enter into the stability agreement (the stability regime would be in force as of the date in which the full investment is met). Companies can choose to benefit from the stabilised regime in advance for a maximum period of eight years, within which the minimum investment shall be reached. Such advanced term shall be deducted from the 12-year term.32 Companies with a starting capacity of over 15,000 tons per day or with expansion projects underway aimed at reaching a capacity of over 20,000 tons per day, may enter into a 15-year stability agreement. Additionally, companies that take on an investment commitment of at least US$500 million may also enter into a stability agreement (the stability regime would be in force as of the date in which the full investment is met). Companies can choose to benefit from the stabilised regimen in advance for a maximum period of eight years, within which the minimum investment shall be reached. Such advanced term shall be deducted from the 15-year term.33 From a tax perspective, under general stability agreements investors are only entitled to obtain stability on the income tax applicable regime. However, mining stability agreements allows investors to protect themselves from any changes in the income tax system, compensation, the tax refund regime, duties, consumption taxes – except for the tax rate – and the special regime for tax returns.34 Unlike the Argentine tax stability regime, in Peru the stability protection under a mining stability agreement is granted once the investor files an investment plan with the MINEM. The stability guarantee will start as of the date of accreditation of execution of the investment. Investors in mining activities are entitled to execute both kinds of agreement (ie, the general stability agreement with the Private Investment Promotion Agency of Peru, and the mining stability agreement with the MINEM, at the same time in order to benefit from both regimes).35 Finally, companies that are protected by a tax stability agreement in Peru are charged with a special mining tax. This tax is levied between the 2 per cent and 8.4 per cent on

32 ibid, section 6. 33 ibid, section 5. 34 In addition to the tax stability benefit, under the mining stability agreements, investors are entitled to freely use and move income (in any currency) generated through exports or domestic sales as well as protected with the non-discrimination on exchange rates, free trade of mineral products, and other commerce-related benefits. 35 Although most mining investments will try to be protected by the mining stability agreement set forth under the GML – since this particular regime grants a broader range of guarantees – investments that are under US$20 million or that do not involve the handling of 350 metric tons per day will not be covered by the mining stability agreement. Thus, in practice, the general stability agreement is used by smaller and major investors to protect the investments made before the feasibility study, since investments made before the feasibility study are not covered by the mining stability agreement.

76 © Law Business Research 2019 Tax Stability in the Mining Industry operational profit from sales of metal minerals, and can be deducted from the Peruvian Corporate Income Tax.36

Final comments In conclusion, a lesson that developing countries should learn from developed countries is that the successful development of mining activity depends mainly on the legal certainty protection provided to the investor. Taking into account the economic and legal volatility in the countries from the region, the guarantee of tax stability stands as an essential tool with the purpose of protecting the mining investment from incidences of regulatory changes that may occur over the duration of the mining project. As shown in this analysis, in Argentina such guarantee of tax stability is stipulated by law, whereas in Chile and Peru the investor must enter into an agreement with the state in order to qualify for the benefit of tax stability. Apart from the debate about which one of the aforementioned systems – statutory or contractual tax stability – offers a higher grade of protection, the fact is that, in practice, such countries have not always respected the application of the guarantee of tax stability – in Argentina, through the creation of export rights on certain commodities by the previous administration, and in Chile and Peru through the renegotiation of the tax stability agreement by the government. In Argentina, the main obstacle for being fully protected with the tax stability provision is that, in practice, whenever there is an increase in the applicable tax rates or an introduction of a new tax, the investor is the one who must prove the actual increase in the tax burden existing at the date of the presentation of the feasibility study. Such situation has caused a myriad of judicial conflicts with an unfavourable outcome for the investor. Therefore, any amendment to current regulations of mining investments in Argentina should consider certain adjustments so that the tax stability regime does not remain an empty promise. A possible solution could be to modify the scope of the current law provision – which allows the state to increase the applicable rates and create new taxes as long as other taxes are eliminated so as to compensate such increase – by a mechanism that directly allows the investor to apply the tax regime that was in force on the date of filing the feasibility study during the development of the mining project, without having the burden of demonstrating the increase of the tax burden every time there is a modification to the applicable tax rates.

36 Law No. 29,789, Peru, 28 September 2011, Peruvian National Congress website http://www2. congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/06D51ADCA0414E3805257F0300710C4D/$FI LE/Ley_29789_Ley_crea_ImpuestoEspecial_a_la_Miner%C3%ADa.pdf. However, companies not protected with a tax stability agreement are subject to the special mining contribution created by Law No. 29,790. The special contribution ranges from 4 per cent to 13.2 per cent levied on the operational profits made on sales of metallic minerals. This special contribution is deductible for income tax purposes, and mining royalty payments may be credited against this tax. Law No. 29,790 Peru, 28 September 2011, Peruvian National Congress website http://www2.congreso.gob.pe/sicr/ cendocbib/con4_uibd.nsf/D5899EB52CE3855805257C2000558A8C/$FILE/29790.pdf.

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A High Price to Pay – An Overview of Anti-Corruption Law in Canada

Frank Mariage and Youcef Belrachid1

In 2013, Norm Keith, author and colleague at Fasken, stated that ‘[c]orruption and bribery of public officials is a fact of life and also a way of life in many countries around the world.’2 Indeed, can any country or region around the world claim today that it is immune to corruption? This harsh reality is supported by Transparency International’s Corruption Perceptions Index (CPI), which scores the public sector corruption of over 180 countries and territories around the world. The CPI ranks countries on a scale from zero to 100 – scoring closer to 100 indicates a smaller level of corruption. Conversely, in regular commercial dealings, scoring lower on the scale indicates a higher presence of corruption. A score under 50 indicates that corruption is a critical threat to the country’s economy. Transparency International’s latest report, in 2017, shows some alarming trends. In fact, only 13 countries score between 80 and 90, with New Zealand leading the select group with a score of 89 (Canada is ranked eighth with a score of 82, and the United States is ranked 16th with a score of 75), but more importantly, over two-thirds of countries score below 50 on the index (Syria, South Sudan and Somalia ranking lowest with scores of 14, 12 and 9 respectively) with a global average of 43.3 At the regional level, the worst performing region is sub-Saharan Africa with a score of 32 – 11 points under the global average.4 When looking more specifically at the West African region, the results are unfortunately not so encouraging either. Unsurprisingly, among the 15 members of the Economic

1 Frank Mariage is a partner and Youcef Belrachid is an articling student at Fasken Martineau DuMoulin LLP. 2 Norm Keith, Canadian Anti-corruption Law and Compliance (Ontario: LexisNexis Canada, 2013) at 1. 3 Transparency International, Corruption Perceptions Index 2017, Ernst & Young (21 February 2018), online: https://www.transparency.org/news/feature/corruption_perceptions_index_2017. 4 ibid.

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Community of West African States, only Cape Verde is ranked over the critical mark of 50 on the index. Cases of corruption have plagued West Africa for decades, especially with respect to the mining industry. In 2016, the results of an investigation ordered by the parliament of Burkina Faso revealed that the country ‘lost nearly a billion dollars to corruption and mismanagement in the mining sector in the decade leading up to the fall of Blaise Compaoré [ex-president of Burkina Faso] and the year after he was forced out’5 (ie, between 2005 and 2015). Furthermore, according to the commission in charge of the investigation, François Compaoré, Blaise Compaoré’s adviser and brother, collected bribes of 5 billion CFA francs in connection to the awarding of a mining contract in 2014.6 The head of the commission, Ousseni Tamboura, explained that ‘[t]he losses are essentially due to bad governance of the sector, bad management, and the appropriation of the mining economy for self-serving interests’.7 In 2017, former Minister of Mines and Geology of the Republic of Guinea Mahmoud Thiam was sentenced in the United States under the Foreign Corrupt Practices Act (FCPA)8 to seven years in prison for laundering US$8.5 million in bribes paid to him by executives of China Sonangol International Ltd and China International Fund in exchange for mining rights.9 Although many more could be mentioned, these few instances unfortunately demonstrate the predominance of corrupt practices in the West African mining sector and its close nexus to public officials. As the issue of corruption and bribery represents a great challenge for Canadian corporations – and corporations from other countries – with increasing business activities (mining, etc) in the region of West Africa (and around the world), and considering the legal risks attached to such unethical behaviour, the ‘Canadian Legal Framework’ section of this chapter offers an overview of the Canadian legal framework under the Corruption of Foreign Public Officials Act (CFPOA)10 with regard to corruption in business dealings involving a foreign public official (FPO), along with a high-level comparison to the legal framework in place in the United States and the United Kingdom. ‘Canadian case law’ explores some of the most important case law in Canada to demonstrate the severity and seriousness with which courts have addressed the issue of bribery and corruption. ‘Best practices’ seeks to offer a selection of best practices with regard to international commercial dealings and corporate governance in an effort to completely eliminate the temptation to result to acts of corruption and bribery to advance business objectives or opportunities in foreign countries.

5 Tim Cocks and Toby Copra, ‘Burkina Faso mining lost $1 billion to graft in decade: parliament’, Thomson Reuters (26 October 2016), online: https://www.reuters.com/article/us-burkina-mining- corruption-idUSKCN12Q2QO. 6 ibid. 7 ibid. 8 Foreign Corrupt Practices Act, 15 U.S.C. § 78m-78ff (1998) . 9 News24, ‘US jails ex-Guinea minister over China bribes’, 26 August 2017, online: https://www. news24.com/Africa/ News/us-jails-ex-guinea-minister-over-china-bribes-20170826; see also the United States Department of Justice, Justice News, ‘Former Guinean Minister of Mines Sentenced to Seven Years in Prison for Receiving and Laundering $8.5 Million in Bribes From China International Fund and China Sonangol’, 25 August 2017, online: https://www.justice.gov/opa/pr/former-guinean- minister-mines-sentenced-seven-years-prison-receiving-and-laundering-85. 10 Corruption of Foreign Public Officials Act, S.C. 1998, c 34.

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Canadian legal framework In many emerging economies, the making of certain payments to an FPO was often considered and referred to as the ‘cost of doing business’. So much so that for many years, Canadian legislation on the matter allowed ‘facilitation payments’ as a solution to the business challenges brought upon Canadian companies by unduly slow-moving bureaucracies.11 With the FCPA, the United States was the instigator of an international effort to address the issue of foreign corrupt transactions around the world. This initiative gave birth to the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention). Signatories of the OECD Convention agree to adopt ‘effective measures to deter, prevent and combat the bribery of FPOs in connection with international business transactions’,12 and most importantly to do the following:

take such measures as may be necessary to establish that it is a criminal offence under [the country’s] law for any person intentionally to offer, promise or give any undue pecuniary or other advantage whether directly or through intermediaries, to a foreign public official [. . .] in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain [. . .] improper advantage in the conduct of international business.13

The OECD Convention stresses that the attempt and conspiracy to bribe a foreign official must also be considered a criminal offence.14 Since the ratification of the OECD Convention, over 350 individuals and over 130 entities in more than one-third of member states have been sanctioned under criminal proceedings for foreign bribery.15 Based on the most recent enforcement data, not only have over 100 of those individuals been sentenced to prison, but there are currently over 300 investigations and over 100 prosecutions related to OECD Convention offences ongoing within member states.16 Though these numbers may be alarming, they are no surprise. According to a recent study conducted by Ernst & Young, 36 per cent of chief financial officers (CFO) and 46 per cent of other finance team members interviewed could rationalise unethical conduct (such as corruption and bribery) to improve financial performance.17 Canada signed the OECD

11 Since the 2013 amendments, facilitation payments are no longer allowed under the CFPOA. See ‘Corruption of Foreign Public Officials Act’ below. 12 Preamble, Convention on Combating Bribery of Foreign Officials in International Business Transactions and Related Documents (17 December 1997) OECD 2011 (entered into force 15 February 1999). 13 ibid. 14 ibid. 15 OECD Working Group on Bribery, ‘2015 Data on Enforcement of Anti-Bribery Convention’, OECD 216 at 1; cited in Global Affairs Canada (GAC), ‘Eighteenth Annual Report to Parliament’, Canada’s Fight Against Foreign Bribery, (last updated 11 October 2017) at 2 (GAC Annual Report). 16 ibid. 17 Ernst & Young, Corporate misconduct – individual consequences, 14th Global Fraud Survey 2016 at 14; between October 2015 and January 2016, Ernst & Young surveyed 2,825 individuals from 62 countries and territories. These individuals were senior executives, which included CFOs, chief compliance officers, heads of internal audits and heads of legal departments.

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Convention on 17 December 1997, and quickly realised its obligations by enacting the CFPOA.

Corruption of Foreign Public Officials Act The CFPOA came into force on 14 February 1999, thereby allowing Canada to officially become a member state of the OECD Convention.18 Finally, far-reaching amendments to the CFPOA – the most important since the enactment of the CFPOA – were proposed through Bill S-14, and received royal assent on 19 June 2013 (Bill S-14).19 Fundamental to the CFPOA is section 3(1), which codifies its primary offence – bribing an FPO. It states that every person commits a criminal offence where, in order to obtain or retain an advantage, he or she directly or indirectly provides a benefit of any kind to an FPO or to any person for the benefit of an FPO (i) as consideration for an act or omission by the official in connection with the official’s duties or functions, or (ii) to induce the official to influence any acts or decisions of the foreign state or public international organisation for which such official performs duties or functions.20 The term ‘person’ as defined by the CFPOA adopts the definition in the Criminal Code21 where it includes individuals, organisations (including corporations), the Crown and third parties such as agents, consultants or any other intermediary. As for the term ‘business’, the current definition under the CFPOA reads as follows: ‘“business” means any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere.’22 Pursuant to Keith, this definition is one of the results of Bill S-14, which effectively removed the words ‘for profits’ from the definition, and therefore eliminated the requirement for a business ‘to be doing work for profit, be profitable or have a profit motive’.23 Finally, a ‘foreign public official’ is understood broadly under the CFPOA as any person who (i) holds a legislative, administrative or judicial position of a foreign state, (ii) performs public duties or functions for a foreign state, including a person employed by a body or authority that is established to perform such duties or functions on behalf of the foreign state, or (iii) is an official or agent of a public international organisation that is formed by two or more states or governments, or by two or more such public international organisations.24 Bill S-14 has brought forth five important modifications. The most important amendment of the CFPOA is the addition of section 4(1), a new offence by which it is now illegal – among other things – to maintain false accounts, make transactions that are not recorded or adequately identified, record non-existent expenditures, use false documents or intentionally destroy accounting books if such action is carried out in order to obtain

18 Note that Canada is part of two other international treaties related to bribery and corruption on top of the OECD Convention, namely the United Nations Convention against Corruption and the Inter- American Convention Against Corruption. 19 An Act to amend the Corruption of Foreign Public Officials Act, S.C. 2013, c. 26. 20 CFPOA, supra note 9, s 3(1). 21 Criminal Code, R.S.C., 1985, c. C-46 (see Section 2). 22 CFPOA, supra note 1, s 2. 23 Keith, supra note 1 at 21. 24 CFPOA, supra note 9, s 2.

81 © Law Business Research 2019 A High Price to Pay – An Overview of Anti-Corruption Law in Canada an advantage or hide that bribery.25 Arguably, this addition ‘effectively lowers the bar for prosecutions by requiring Canadian companies to keep adequate – and truthful – records, and establishing stiff fines for failure to do so’.26 Bill S-14 has also significantly expanded the scope of Canadian jurisdiction, allowing the country to prosecute Canadian citizens (including officers and directors), permanent residents and Canadian corporations for offences under the CFPOA, regardless of where the offence took place.27 Adding this extraterritorial application of Canadian law certainly reinforces the need for businesses to adopt rigorous and clear directions for Canadian employees working abroad. The other three major changes concern facilitation payments, the maximum penalty for the conviction of individuals and the exclusive jurisdiction of the Royal Canadian Mounted Police (RCMP). First, prior to Bill S-14, the CFPOA used to permit facilitation payments (commonly called ‘grease payments’)28 when, in particular circumstances, the payment of nominal amounts of money were made for the purpose of expediting or securing the performance of an ‘act of routine nature’ by an FPO.29 This type of payment was effectively repealed by Bill S-14. However, two statutory defences have been maintained. In fact, paragraph 3(3)(a) states that no person can be found guilty under the CFPOA if the benefit given is permitted or required under the laws of the foreign state. As for paragraph 3(3)(b), it allows the payment of reasonable expenses incurred in good faith on behalf of the FPOs that are related to the promotion of the individual’s products or services, or the execution or performance of a contract between an individual and a foreign state for the official that performs duties or functions.30 The maximum penalty for the conviction of individuals under the CFPOA has been increased from five years to an impressive 14 years. Further, this means that ‘individuals found to have violated the CFPOA will not be eligible upon conviction for either conditional sentences or discharges’.31 Corporations, although unconcerned by prison sentences, are still exposed to monetary fines of an unlimited amount, subject to the discretion of a judge.32 Finally, Bill S-14 enacted a new section 6 giving the exclusive

25 CFPOA, supra note 1, s 4(1). 26 Peter E Kirby and Guy W Giorno, ‘Bill S-14: Canada Strengthens Its Anti-Bribery Law’, Corporate Social Responsibility Law Bulletin, Fasken, (6 February 2013), online: https://www.fasken.com/en/ knowledgehub/2013/02/corporatesocialresponsibilitylawbulletin-20130206. 27 CFPOA, supra note 9, s 5(1). 28 CFPOA, supra note 9, s 3(4) and s 3(5) of CFPOA in force in 1999 prior to being repealed by Bill S-14. 29 Riyaz Dattu, ‘Expansive Changes to Canada’s Foreign Anti-Corruption Legislation Now in Force: Existing Compliance Programs Will Require Revisions’, Osler, Corporate Review – 2013 (June 2013), online: https://www.osler.com/en/resources/governance/2013/corporate-review-june-en/expansive- changes-to-canada-s-foreign-anti-corrupt. 30 With regard to paragraph 3(3)(a) CFPOA, so far no case law has given any example of this provision’s application. In the years to come, jurisprudence should be able to enlighten our understanding of the phrasing. The same reality applies to paragraph 3(3)(b). Therefore, besides offering an overview of these provisions, it is difficult to give any additional details on their judicial interpretation at this time. It is also unclear why these provisions were not redrafted following the extensive effort to amend the CFPOA under Bill S-14. 31 ibid. 32 Keith, supra note 1 at 93. Keith gives the following explanation: ‘Regarding the guilt of an organization, including a corporation, the CFPOA is silent on the issue of penalty. Therefore, the

82 © Law Business Research 2019 A High Price to Pay – An Overview of Anti-Corruption Law in Canada investigative jurisdiction to the RCMP and, more precisely, to its dedicated International Anti-Corruption Unit. Although some interpret this legislative development as a logical response to a prior lack of enforcement of the CFPOA by local police officers and local crown attorneys,33 others view this amendment as an attempt to eliminate the potential of the entire CFPOA for private prosecutions – presumably by international organisations such as NGOs.34

Comparing the CFPOA to the FCPA The FCPA, enacted in 1977, was the first significant international anti-corruption law. It is enforced by both the US Department of Justice – through its Federal Bureau of Investigation – and the Securities and Exchange Commission, which have intensified, in the past decade, their identification and prosecution efforts of FCPA violations.35 This is how the Department of Justice summarises the main FCPA offence:

[T]he anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.36

Originally, the FCPA was only applied to public issuers and to domestic concerns (ie, US citizens and businesses).37 However, amendments resulting from the International Anti-Bribery and Fair Competition Act of 199838 broadened the scope of the legislation making it applicable to three categories of persons or entities, namely ‘issuers’, ‘domestic concerns’ and certain persons and entities under ‘territorial jurisdiction’.39 These three

default provisions in the Criminal Code, that deal with monitoring penalties for organizations, including corporations, apply to a corporation convicted under the CFPOA. Startling to many who may learn this the hard way, there is no upper or maximum penalty prescribed in the Criminal Code for an indictable offence. There is no pre-said maximum or limit to the fine.’ 33 ibid at 32; Keith says: ‘This amendment states in law what, is de facto, had been taking place for several years. That is the RCMP had taken over the role of being Canada’s national and international police and investigating agency relating to the corruption of foreign public officials under the CFPOA.’ 34 Kirby and Giorno, supra note 25. 35 T Markus Funk, ‘Getting What They Pay For: The Far-Reaching Impact Of the Dodd-Frank Act’s “Whistleblower Bounty” Incentives on FCPA Enforcement’, Bureau of National Affairs, White Collar Crime Report, (10 September 2010) at 1–3. 36 The US Department of Justice, Fraud Section, ‘Foreign Corrupt Practices Act’ (3 February 2017), online: https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act. 37 Keith, supra note 1 at 4. 38 Pub. L. No. 105-366, 112 Stat. 3302 (enacted 10 November 1998). 39 GAN Business Anti-corruption Portal, ‘US Foreign Corrupt Practices Act (FCPA)’, Anti-corruption Legislation, online: https://www.business-anti-corruption.com/anti-corruption-legislation/fcpa- foreign-corrupt-practices-act/.

83 © Law Business Research 2019 A High Price to Pay – An Overview of Anti-Corruption Law in Canada categories include all US individuals – including officers, directors and employees – as well as businesses, certain defined foreign public officials and certain issuers of financial securities.40 The FCPA further mandates record-keeping and internal control standards for publicly held corporations registered under the Securities Exchange Act of 1934. A particularity of the FCPA is that both criminal and civil penalties are available; and they can be significant, reaching up to C$2 million per count for corporations under criminal proceedings, whereas individuals face both a maximum fine of C$1 million per count and imprisonment for up to five years. As for civil proceedings, sentences may range from C$50,000 to C$500,000 for corporations, and from C$5,000 to C$100,000 for individuals. Another particularity is that the FCPA also provides for additional penalties in case of wilful violations such as ‘wilfully [sic] and knowingly making a false or misleading statement’.41 These penalties can amount to C$25 million per count for corporations, and C$5 million per count or 20 years of prison, or both, for individuals.42 Another major difference with the CFPOA is that, unlike under Canadian law, facilitation payments are permitted under the FCPA. The FCPA states that the anti-bribery provisions ‘shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official’.43 Similarly to the CFPOA, however, lawful payments under the laws of the foreign country and reasonable bona fide expenditures incurred by, or on behalf of, the foreign official or party, which are related to the promotion, demonstration or explanation or product or services, or the execution of a contract with a foreign government, are also exceptions.44

Comparing the CFPOA to the Bribery Act In an effort to replace legislation that was more than 100 years old, the United Kingdom, after having ratified the OECD Convention, took more than a decade longer than Canada to enact anti-corruption legislation. In addressing the general bribery offences, the Bribery Act 2010 (UKBA)45 came into force on 1 July 2011 and ‘prohibits both the giving and the receiving of financial or other advantage to induce a person to improperly perform a function or activity or to reward a person for improperly performing a function or activity’.46 The UKBA also targets the bribery of FPOs by prohibiting a person from giving a financial or other advantage to an FPO in order to obtain or retain a business or an advantage in the conduct of such business. Similarly to both the CFPOA and the FCPA (as well as the OECD Convention), section 6(3)(b) of the UKBA provides a defence for payments permitted under the written law applicable in the foreign country. Similarly to the CFPOA, enforcement under the UKBA is carried out by way of criminal prosecution, and fines – of an unlimited amount – are left to the discretion of the court. As for imprisonment sentences for individuals, the maximum period is 10 years, slightly lower than the CFPOA. Another distinction from both the FCPA and the CFPOA

40 Keith, supra note 1 at 4. 41 ibid at 6. 42 ibid. 43 FCPA, supra note 7, s 78dd-1(b). 44 Keith, supra note 1 at 5–6. 45 Bribery Act 2010, c. 23, online: http://www.legislation.gov.uk/ukpga/2010/23/contents. 46 Keith, supra note 1 at 13; see also Bribery Act 2010, ch. 23.

84 © Law Business Research 2019 A High Price to Pay – An Overview of Anti-Corruption Law in Canada is that a commercial and business organisation may be found guilty of failing to prevent the prohibited types of bribery. As Keith explains, ‘[i]n this situation, the organization may raise a defence of due diligence by proving that, at the time of the alleged offence, it “had in place adequate procedures designed to prevent persons associated with [the organisation] from undertaking such conduct”’.47

Canadian case law The first major prosecution of a Canadian corporation under Canada’s CFPOA happened with regard to Niko Resources Ltd (Niko), a publicly traded oil and natural gas exploration and production company based in Calgary, Alberta. In this case, Niko entered a guilty plea before the Court of Queen’s Bench (Calgary) on 24 June 2011 for a count of bribery resulting in a fine of C$8.26 million and an added 15 per cent victim surcharge.48 According to the plea bargain agreement between Niko and the Crown, the subsidiary Niko Bangladesh entered into a joint venture agreement (JVA) in 2003 with BAPEX49 to develop two gas fields in Bangladesh. On 7 January 2005, while drilling, an explosion occurred at the Chattak-2 gas well50 that left a large crater in the ground. Although nobody got injured by the incident, the gas fire burned for weeks, forcing the evacuation of many. The resulting diplomatic crisis and negative press denouncing the fairness of the entire JVA award process presumably led to the bribery described as follows in the plea agreement:

In May 2005, Niko Bangladesh provided the use of a [Toyota Land Cruiser] costing [. . .] $190,984.00 to AKM Mosharraf Hossain, the Bangladeshi State Minister for Energy and Mineral Resources, in order to influence the Minister in dealings with Niko Bangladesh within the context of ongoing business dealings [. . .] Additionally, Niko Canada paid the travel and accommodation expenses for Minister [. . .] Hossain to travel from Bangladesh to Calgary to attend to GO EXPO oil and gas exposition, and onward to New York and Chicago, so that the Minister could visit his family who lived there, the cost being approximately $5,000.00.51

The Crown justified in part the negotiated penalty with the defence as covering, among other things, the cost of the RCMP investigation, which, according to the prosecutor, cost in this single case almost C$870,000. The Niko case, as we will see, clearly set the tone for the following jurisprudence.

47 ibid at 14; referring to the Bribery Act 2010, s 7(2). 48 In addition to the fine, Niko was placed under a probation order, which put the company under the court’s supervision for three years to ensure that audits were completed, to examine the company’s compliance with the CFPOA. This decision was a major turning point in CFPOA prosecutions, especially considering that in the only prior case – R v Watts, [2005] A.J. No. 568 (Alta. Q.B.) – HydroKleen Systems Inc received a monetary fine of only C$25,000. See also GAC Annual Report, supra note 14. 49 BAPEX is the common reference of Bangladesh Petroleum Exploration and Production Company Limited. BAPEX is an exploration and production company, which is indirectly wholly owned by the government of Bangladesh. 50 Located in the Tengratila gas field in north-eastern Bangladesh. 51 R v Niko Ressources Ltd, Reported Clerk Proceedings, Calgary, Alberta, 24 June 2011, the Honourable Mr Justice Brooker, (Alta. QB) at 3.

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In fact, the next case is one where Griffiths Energy International Inc (Griffith), a privately held oil and gas company based in Calgary, was sentenced, on 25 January 2013, to pay a C$9 million fine with a 15 per cent victim surcharge, for a total financial penalty of C$10.35 million.52 This case is of particular interest because it relates to the largest fine imposed under the CFPOA to date. More so, it is the first case where a corporation took steps to self-disclose its past corrupt practices. In 2008, Griffith made initial enquiries about acquiring blocks in Chad, and established contact with the Chadian embassy. Then occurred, through the embassy, a formal introduction to Chad’s then Minister of Petroleum and Energy.53 What followed was a series of negotiation sessions between 2009 and 2011 that led to the payment of C$2 million to a corporate entity owned by the wife of the foreign ambassador, as well as the issuance of a number of founder shares of Griffith.54 Shortly thereafter, a boating acci- dent resulted in the death of Brant Griffith, high-profile Bay Street investment banker and founder of Griffith. It is therefore the succeeding management team that made the decision, once it discovered the corrupt transactions, to disclose its CFPOA breaches to authorities, and cooperate with their investigation, effectively resulting in a guilty plea that Griffith directly agreed to provide, and indirectly provided, improper benefits to a Chadian public official in order to further the business objectives of Griffith. Despite the joint submission by the prosecution and defence, the court explained that such joint submission is not binding on the court and added as follows:

The bribing of a foreign official by a Canadian company is a serious matter. As I said in R. v. Niko Resources Ltd., such bribes, besides being an embarrassment to all Canadians, prejudice Canada’s efforts to foster and promote effective governmental and commercial relations with other countries; and where, as here, the bribe is to an official of a developing nation, it undermines the bureaucratic or governmental infrastructure for which the bribed official works. Accordingly, the penalty imposed must be sufficient to show the Court’s denunciation of such conduct as well as provide deterrence to other potential offenders.55

This case clearly shows that although self-disclosure may help mitigate legal consequences, it still does not prevent heavy fines from being imposed. The next case – R v Karigar56 – is of particular importance as it represents the very first imprisonment sentence held against an individual under the CFPOA.57 On 15 August 2013, Nazir Karigar was convicted to three years’ imprisonment by the Ontario Superior Court of Justice for making a payment to Indian government officials to facilitate the execution of a multimillion-dollar contract for the supply of a security system by Cryptometrics, a

52 GAC Annual Report, supra note 46. 53 Keith, supra note 1 at 131; citing the agreed statement of facts, set out as exhibit two in the proceedings. 54 ibid at 132–137. 55 R v Griffiths Energy International, [2013] A.J. No. 412 at para 8–9. 56 R v Karigar, 2013 ONSC 5199, [2013] O.J. No. 3661. 57 GAC Annual Report, supra note 14.

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Canadian high-tech firm.58 More specifically, the accused was the paid agent of a group of Canadian companies that sought to secure a major contract from Air India for the provision of facial recognition software and related equipment.59 The contract sought was never awarded to any entity represented by the accused. As the Court puts it, several aspects of the evidence supported the conclusion that the accused was an ‘active and knowledgeable part of a conspiracy to offer bribes to Air India officials to obtain the Air India contract’.60 Among other things, the vice president attended meetings at which the necessity of bribes was raised; several emails contained details around the method of payment of such bribes; and a spreadsheet budgeting intended bribes were circulated within the company.61 The collection of such facts led the Court to conclude that it was not necessary for the Crown to establish actual payment of the bribe and that it was sufficient to show that the accused believed that bribes were in fact paid, as was demonstrated in his comments to various authorities.62 On 6 July 2017, the Ontario Court of Appeal dismissed Karigar’s appeal from his 2013 conviction. The Court held that ‘the foreign bribery offence is clearly committed when a person agrees with a foreign public official to give that official a benefit, but, equally clearly, when there is an indirect agreement to give or offer an advantage.’63 As these cases have shown, the consequences of an infraction under the CFPOA can be fairly important, and further demonstrate the necessity for Canadian corporations to exercise thorough oversight of all persons involved in performing acts and duties for or on their behalf. The message is indeed clear: there is no room for complacency. It is therefore imperative for all businesses to be proactive in implementing preventative measures against acts of bribery and corruption. ‘Best practices’ further addresses this issue and offers a set of advice on best practices that will allow corporations to minimise the potential risks of being engaged directly or indirectly in such acts.

Best practices As seen so far, since its initial enactment, the CFPOA was strengthened, and its reach extended by the passage of Bill S-14. It is thus an undeniable truth that the corporate risk landscape is changing when it comes to the issue of corrupt practices in international business dealings. In this regard, what can Canadian businesses do to foster corrupt-free business practices and ensure compliance with the CFPOA? In our opinion, this can and should be achieved through, notably, the use of preventative measures and training programmes. Preventing violations and minimising liability requires an effective compliance programme. To create an effective compliance programme, it is vital to first identify the specific risks a company faces. Based on the level of identified risk, it will subsequently be

58 ibid. 59 R v Karigar, supra note 54 at para 3. 60 ibid at para 15. 61 ibid at para 30. 62 ibid at para 33. 63 GAC Annual Report, supra note 14; in reference to R v Karigar, 2017 ONCA 576, [2017] O.J. No. 3530 at para 43.

87 © Law Business Research 2019 A High Price to Pay – An Overview of Anti-Corruption Law in Canada possible – and necessary – to design a programme that allocates resources and oversight to transactions and areas of the company’s business. In the event that a violation to the CFPOA occurs, an effective compliance programme may make the difference between a conviction following the decision by enforcement authorities to prosecute or not. In terms of risk assessment, it is important to know that investigations and prosecutions frequently involve facts relating to the use of third-party intermediaries such as sale agents, distributors and finders, and various business combinations such as join ventures.64 When looking for compliance programmes, it is suggested that corporations take particular care in implementing the following elements: • management support and resources; • written standards and controls; • monitoring, auditing and evaluation protocols; • enforcement measures; • continuous review; and • whistle-blower procedures.

Furthermore, it is highly recommended that corporations adopt a written code of ethics reminding employees that it is essential that all of the corporation’s activities be conducted with integrity and transparency. In order to be effective, such code should include clear guidance as to proper behaviours to have when dealing with customers, suppliers, other employees, shareholders and other third parties. It should also include the procedure to follow in order to report a case of non-compliance with the code. Finally, the promotion of best practices within a business and the prevention of corruption, traffic of influence and conflicts of interest is best ensured by the adoption of a written code of conduct. The code of conduct complements the compliance programme and the code of ethics in that it aims to inform employees of the risks associated with bribery and traffic of influence, as well as proscribed behaviour within the company. It is therefore a great tool to emphasise a zero-tolerance policy towards corrupt practices. It is also possible to adopt a code of ethical conduct regrouping all that has been mentioned above. The main goal of ensuring a continuous training of directors, officers or any other employee of the corporation is to establish a constant reminder of the corporation’s anti-corruption culture and ethical business practices. As such, training on the relevant legal frameworks and their implications is a good starting point to establish the importance of upholding the corporation’s standard. Other separate trainings should target matters such as business ethics, risks related to corruption, issues for the corporation arising from bribery and corrupt practices, and the importance of compliance. Furthermore, we highly suggest that these trainings be offered online via a private server in order to facilitate their access.

64 As seen previously in R v. Niko Ressources Ltd, supra note 49.

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Conclusion It is clear that acts of corruption and bribery continue to occur on a regular basis in any jurisdiction given that, as shown in Transparency International’s latest CPI, no country is immune to such acts (with some regions being prone to acts of bribery and corruption more than others). Going forward, however, as the landscape of corporate risk changes, public scrutiny intensifies and regulations tighten around the world, it has become an inevitable requirement for companies to thoroughly conduct risk assessments and implement a top-down culture against bribery and corruption. In addressing the concerning issue of corruption, this chapter offered an overview of the Canadian legal framework with regards to corruption in business dealings involving an FPO, and established that the CFPOA, alongside the Criminal Code, directly codified the offences of corruption, bribery and false accounts (and also showed that the CFPOA is part of a greater network of anti-bribery laws, including the UKBA and the FCPA). Walking through the CFPOA’s latest amendments, this piece sought to identify the nature and scope of its codified offences. This chapter also explored in detail some of the most important case law in Canada in order to draw lessons worth learning. From this analysis, it has become apparent that any benefit sought through corrupt practices is marginal compared to the consequences of getting caught. Finally, this chapter offered a selection of best practices with regard to international commercial dealings and corporate governance. Ultimately, it is easy to conclude that corruption and bribery no longer have their place in international affairs, and that compliance can be achieved if the suggested mechanisms are diligently and consistently enforced. The question of whether the business community has the will to adapt no longer seems to be a question but rather a necessity.

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Community Engagement

Sebastián Donoso and Francisca Vergara1

This chapter covers indigenous issues (UNDRIP and ILO Convention 169) under the broad umbrella of community engagement.

What is community engagement? Following ISO 26000,2 we understand community engagement as stakeholder engagement that is able to comply with the social responsibility of an organisation for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour.3 Stakeholder engagement is defined by ISO 26000 as the activity undertaken to create opportunities for dialogue between an organisation and one or more of its stakeholders, with the aim of providing an informed basis for the organisation’s decisions.4 The definition of social dialogue5 by ISO 26000 provides the basis to identify the range of activities that may be undertaken to create opportunities for dialogue between an organisation and one or more of its stakeholders. According to ISO 260006 community engagement or stakeholder engagement, is as follows: • a range of activities undertaken to create opportunities for dialogue between an organisation and one or more of its stakeholders; • activities that can be grouped under the categories of negotiation, consultation and exchange of information;

1 Sebastián Donoso is a partner and Francisca Vergara is an associate, at Sebastián Donoso & Asociados. 2 ISO 26000 is a guidance on social responsibility issued in 2010 by the International Organization for Standardization. 3 ISO 26000, Terms and definitions, 2.12. 4 ISO 26000, Terms and definitions, 2.21. 5 ISO 26000, Terms and definitions, 2.17. 6 ISO 26000, Terms and definitions, 2.12.

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• those same activities must be able to comply with the social responsibility of the organisation for the impacts of its decisions and activities on society and the environment; and • as such, those activities must be able to: • contribute to sustainable development, including health and the welfare of society; • take into account the expectations of stakeholders; • be in compliance with applicable law and consistent with international norms of behaviour; and • be integrated throughout the organisation and practised in its relationships.

Principles of community engagement ISO 26000 As a particular type of dialogue that falls within the social responsibility of an organisation, the principles of social responsibility7 set out by ISO 26000 fully apply to community engagement. All principles are listed below – those with a closer connection to community engagement include a brief explanation in the words of ISO 26000: • accountability; • transparency: • an organisation should disclose in a clear, accurate and complete manner, and to a reasonable and sufficient degree, the policies, decisions and activities for which it is responsible, including its known, and likely impacts on society and the environment; • ethical behaviour: • an organisation’s behaviour should be based on the values of honesty, equity and integrity. These imply a concern for people, animals and the environment, and a commitment to address the impact of its activities and decisions on stakeholders’ interests; • respect for stakeholders’ interests: • an organisation should respect, consider and respond to the interests of its stakeholders; • respect for the rule of law; • respect for international norms of behaviour; and • respect for human rights.

International Council on Mining and Metals (ICMM) The ‘Indigenous peoples and mining’ position statement ‘sets out ICMM members’ approach to engaging with indigenous peoples and to free, prior and informed consent (FPIC)’. It adds the following:

ICMM’s vision is for constructive relationships between mining and metals companies and indigenous peoples that are based on mutual respect, meaningful engagement, trust and mutual benefit.

7 ISO 26000, Principles of social responsibility, page 10.

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ICMM thus provides the fundamental principles for engagement with indigenous peoples: • mutual respect; • meaningful engagement; • trust; and • mutual benefit.

These principles are further recognised and developed through the commitments required from members: • to respect the rights, interests, special connections to lands and waters, and perspectives of indigenous peoples where mining projects are to be located on lands traditionally owned by or under customary use of indigenous peoples; • to adopt and apply engagement and consultation processes that ensure the meaningful participation of indigenous communities in decision-making, through a process that is consistent with their traditional decision-making processes and that is based on good faith negotiation; and • to work to obtain the consent of indigenous people where required according to the position statement.

Consistency with international norms of behaviour Principles 5, 6 and 7 of social responsibility in the ISO 26000 provide that an organisation should respect the rule of law, international norms of behaviour and human rights. Commercial mining ventures face an increasingly complex and challenging framework of international regulations that touch upon different aspects of their activities. This chapter will focus on those international instruments that (i) provide general norms and principles of behaviour that are not specific to the mining sector but fundamental to comprehend the responsibility of an organisation in the context of community engagement, and (ii) regulate general or specific aspects of community engagement, whether they are specific to the mining sector or generic to all commercial ventures.

Non-mining-specific international norms of behaviour The following provide for general norms and principles of behaviour that are not specific to the mining sector: • the United Nations Guiding Principles on Business and Human Rights; • the International Labour Organization's Indigenous and Tribal Peoples Convention, 1989 (No. 169) (ILO 169); • ISO 26000; and • the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP).

Mining-specific international norms of behaviour The following are international instruments that regulate general or specific aspects of community engagement, whether they are specific to the mining sector or generic to all commercial ventures:

ILO 169 • Indigenous consultation or duty to consult indigenous peoples; and • FPIC and consultation in case of relocation.

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UNDRIP • Consultation and FPIC.

The International Finance Corporation (IFC) Performance Standards • Stakeholder consultation and informed consultation and participation (ICP) (Performance Standard 1 (PS1)); and • ICP and FPIC (Performance Standard 7 (PS 7)).

ICMM • Consultation and work to obtain FPIC (‘Indigenous peoples and mining’ position statement); and • consultation and work to obtain FPIC (Good Practice Guide on Indigenous Peoples and Mining).8

Other international instruments and initiatives There are a number of other international instruments that provide requirements regarding community or stakeholder engagement that are context-specific to their respective subjects, including: • the Global Reporting Initiative – in the context of sustainability reporting; • the Extractive Industry Transparency Initiative – the global standard to promote the open and accountable management of extractive resources; • the Voluntary Principles on Security and Human Rights; • the OECD Guidelines for Multinational Enterprises; • the Kimberley Process – an international certification scheme that regulates trade in rough diamonds and aims to prevent the flow of conflict diamonds; and • the International Cyanide Management Code – a voluntary initiative that focuses exclusively on the safe management of cyanide that is produced, transported and used for the recovery of gold and silver, and on mill tailings and leach solutions.

Though these instruments are a key part of international norms of behaviour relevant to the mining industry, they will not be reviewed in this chapter as its focus will be the international instruments mentioned above.

The United Nations Guiding Principles on Business and Human Rights One of the core principles of social responsibility according to ISO 26000 entails that an organisation should respect human rights and recognise both their importance and their universality. This principle is at the core of an organisation’s duty to respect international norms of behaviour, and its relevance should be emphasised accordingly.

8 www.icmm.com/en-gb/publications/mining-and-communities/indigenous-peoples-and -mining-good-practice-guide.

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In 2011, the United Nations Guiding Principles on Business and Human Rights (Guiding Principles),9 were adopted outlining a corporate responsibility to respect human rights.

These Guiding Principles are grounded in recognition of . . . [t]he role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights.10

The Guiding Principles thus acknowledge the fact that businesses, regardless of their size, sector, location, ownership and structure, do influence the enjoyment of human rights. The corporate responsibility to respect human rights is therefore grounded on a core foundational principle: business enterprises should avoid infringing on the human rights of others and should address adverse human rights impacts caused by projects that they are involved with. This responsibility to respect human rights refers to internationally recognised human rights as set out in the International Bill of Human Rights, con- sisting of the Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights, and the International Covenant on Economic, Social and Cultural Rights, as well as the ILO’s Declaration on Fundamental Principles and Rights at Work. Guiding Principle No. 15 further states that in order to meet their responsibility to respect human rights ‘business enterprises should have in place policies and processes appropriate to their size and circumstances.’11 These policies and processes include the following:

(a) a policy commitment to meet their responsibility to respect human rights; (b) a human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights; and (c) pr ocesses to enable the remediation of any adverse human rights impacts they cause or to which they contribute.12

Even though the Guiding Principles constitute a voluntary set of provisions, the responsibility to respect human rights is by no means voluntary. In other words, business enterprises have a responsibility to respect human rights, but they also have a choice of tools (policies and processes among them) to comply with that responsibility. Therefore, according to the Guiding Principles, the corporate responsibility to respect human rights entails that organisations within the mining industry should make an explicit effort to identify the range of specific human rights that are relevant to mining activities. Moreover, the Guiding Principles provide specific guidance on stakeholder

9 John Ruggie, UN Special Representative, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’ (U.N. Doc. A/ HRC/17/31 Mar. 21, 2011) (adopted by the UN Human Rights Council on 16 June 2011). 10 Guiding Principles, General Principles, page 1. 11 Guiding Principles, Principle 15, page 15. 12 Guiding Principles, Principle 15, page 16.

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ICMM The ICMM’s regulation applying to its member companies rests upon a Sustainable Development Framework of 10 Principles. Even though all 10 Principles can be said to be related to community engagement, Principle 10 is key:

Proactively engage key stakeholders on sustainable development challenges and opportunities in an open and transparent manner. Effectively report and independently verify progress and performance.

In addition to existing commitments under the Sustainable Development Framework, the ICMM has delivered the position statement ‘Mining partnerships for development’, according to which ICMM member companies commit to actively support or help develop partnerships with other stakeholder groups with the aim of enhancing the social and economic contribution of mining through development partnerships.

IFC The IFC Sustainability Framework articulates the IFC’s strategic commitment to sustainable development, including its Policy and Performance Standards on Environmental and Social Sustainability.

The Performance Standards are directed towards clients, providing guidance on how to identify risks and impacts, and are designed to help avoid, mitigate, and manage risks and impacts as a way of doing business in a sustainable way, including stakeholder engagement and disclosure obligations of the client in relation to project-level activities.14

Even though all eight Performance Standards provide for some degree of stakeholder engagement, for the purposes of this chapter we will focus on PS 1 (Assessment and Management of Environmental and Social Risks and Impacts) and PS 7 (Indigenous Peoples). Together, all Performance Standards establish standards that the client is to meet throughout the life of an investment by the IFC.

Community engagement dialogue activities continuum We have characterised community engagement dialogue activities, taking into account the definition of social dialogue by ISO 26000 as a range of activities that can be grouped under the categories of negotiation, consultation and exchange of information. In this chapter we will review the specific standards and requirements set out by international norms of behaviour as related to community engagement, making an explicit effort to place them in the continuum formed by those categories.

13 See Guiding Principles 3(d), 18(b), 29 and 31(h). 14 IFC, Overview of Performance Standards on Environmental and Social Sustainability.

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Community engagement dialogue activities are all part of a dialogue continuum whose defining criteria are the level of incidence of each activity. In its basic enunciation, this continuum goes from exchange of information on one end to negotiation on the other, passing through consultation (see Figure 1).

Figure 1 Exchange of information Consultation Negotiation

However, a more elaborate enunciation that takes into account the specific standards and requirements set out by international norms of behaviour shows a continuum that goes from information on one end to consent on the other, passing again through consultation (see Figure 2).

Figure 2 Overall Indigenous Information consultation consultation FPIC

If we overlap both figures, what we see is that there are elements of negotiation, consultation and exchange of information in all specific standards and requirements (see Figure 3).

Figure 3 Exchange of information Consultation Negotiation Overall Indigenous Information consultation consultation FPIC

Consultation IFC PS 1 PS 1 establishes from the very beginning the importance of ‘effective community engagement through disclosure of project-related information and consultation with local communities on matters that directly affect them’. Accordingly, one of the objectives of PS 1 is as follows:

Promote and provide means for adequate engagement with Affected Communities throughout the project cycle on issues that could potentially affect them and to ensure that relevant environmental and social information is disclosed and disseminated.

Environmental and Social Assessment and Management System and stakeholder engagement In a manner consistent with its objective, PS 1 requires clients, in coordination with other responsible government agencies and third parties as appropriate, to (i) conduct a process of environmental and social assessment, and (ii) establish and maintain an

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Environmental and Social Assessment and Management System (ESMS) appropriate to the nature and scale of the project, and commensurate with the level of its environmental and social risks and impacts. PS 1 further establishes that the ESMS will incorporate the following elements: • policy; • identification of risks and impacts; • management programmes; • organisational capacity and competency; • emergency preparedness and response; • stakeholder engagement; and • monitoring and review.

The stakeholder engagement ESMS element required pursuant to PS 1 is seen as ‘the basis for building strong, constructive, and responsive relationships that are essential for the successful management of a project’s environmental and social impacts’.15 According to PS 1, ‘stakeholder engagement is an ongoing process that may involve, in varying degrees, the following elements’: • stakeholder analysis and planning; • disclosure and dissemination of information; • consultation and participation; • a grievance mechanism; and • ongoing reporting to affected communities.

Elements of stakeholder engagement PS 1 acknowledges that ‘The nature, frequency and level of effort of stakeholder engagement may vary considerably and will be commensurate with the project’s risks and adverse impacts, and the project’s phase of development.’

Element 1 – Stakeholder Analysis and Engagement Planning Activities required under this element can be summarised as follows: • identification of the range of stakeholders that may be interested in the client’s actions; • identification of the affected communities (where projects are likely to generate adverse environmental and social impacts to affected communities); and • compliance with the relevant requirements: • development and implementation of a Stakeholder Engagement Plan with particular attention to vulnerable groups and community representatives; and • preparation of a Stakeholder Engagement Framework (as part of an ESMS) outlining general principles and a strategy to identify affected communities (in cases where the exact location of the project is not known, but it is reasonably expected to have significant impacts on local communities).

15 PS 1, paragraph 25, page 7.

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Element 2 – Disclosure of Information According to PS 1, ‘disclosure of relevant project information helps affected communities and other stakeholders understand the risks, impacts and opportunities of the project.’ Therefore, PS 1 requires clients to provide affected communities with access to relevant information on the following: • the purpose, nature and scale of the project; • the duration of proposed project activities; • any risks to and potential impacts on such communities and relevant mitigation measures; • the envisaged stakeholder engagement process; and • the grievance mechanism.

Element 3 – Consultation ‘Consultation’ is the title given by PS 1 to the activities required when adverse impacts exist but are not significant:

When Affected Communities are subject to identified risks and adverse impacts from a project, the client will undertake a process of consultation in a manner that provides the Affected Communities with opportunities to express their views on project risks, impacts and mitigation measures, and allows the client to consider and respond to them.

PS 1 further provides the rules with which the consultation process should comply: • the extent and degree of engagement required by the consultation process should be commensurate with the project’s risks and adverse impacts, and the concerns raised by the affected communities; • effective consultation is a two-way process that should as follows: • begin early in the process of identification of environmental and social risks and impacts, and continue on an ongoing basis as risks and impacts arise; • be based on the prior disclosure and dissemination of relevant, transparent, objective, meaningful and easily accessible information that is in a culturally appropriate local language and format, and is understandable to affected communities; • focus inclusive engagement on those directly affected as opposed to those not directly affected; • be free of external manipulation, interference, coercion or intimidation; • enable meaningful participation, where applicable; and • be documented; and • the client will tailor its consultation process to the language preferences of the affected communities, their decision-making process and the needs of disadvan- taged or vulnerable groups.

Element 4 – ICP ICP is the standard required by PS 1 for projects with potentially significant adverse impacts on affected communities.

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PS 1’s requirements for the ICP process state that it should as follows: • be built upon the steps outlined for consultation (see Element 3); • be built to result in the affected communities’ informed participation; • involve a more in-depth exchange of views and information, and an organised and iterative consultation; • have the goal of incorporating into the client’s decision-making process the views of the affected communities on matters that affect them directly, such as the proposed mitigation measures, the sharing of development benefits and opportunities, and implementation issues; • capture both men’s and women’s views, if necessary, through separate forums or engagements, and reflect men’s and women’s different concerns and priorities about impacts, mitigation mechanisms and benefits, where appropriate; • be documented, in particular, the measures taken to avoid or minimise risks to and adverse impacts on the affected communities; and • give information to those affected about how their concerns have been considered.

Element 5 – Indigenous Peoples PS 1 establishes that projects with adverse impacts to indigenous peoples are required to engage them in a process of ICP unless there are specific circumstances (certain significant impacts) where the client is required to obtain their FPIC. Requirements related to indigenous peoples and the definition of the special circumstances requiring FPIC are regulated in PS 7 and described under Element 6.

Element 6 – Private Sector Responsibilities Under Government-Led Stakeholder Engagement PS 1 establishes special rules for cases where stakeholder engagement is the responsibility of the host government: • The client will collaborate with the responsible government agency, to the extent permitted by the latter, to achieve outcomes that are consistent with the objectives of PS 1. • Where government capacity is limited, the client will play an active role during the stakeholder engagement planning, implementation and monitoring. • In cases were the process conducted by the government does not meet the relevant requirements of PS 1, the client will conduct a complementary process and identify supplemental actions (as appropriate).

Grievance mechanisms and ongoing reporting PS 1 prescribes that the stakeholder engagement process should include, among other elements, grievance mechanisms and ongoing reporting to affected communities. Therefore PS 1 requires clients to establish the following: • a procedure for external communications; • a grievance mechanism for affected communities; and • ongoing reporting to affected communities.

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The procedure for external communications should include methods to do the following: • receive and register external communications from the public; • screen and assess the issues raised, and determine how to address them; • provide, track and document responses, if any; and • adjust the management program, as appropriate.

In addition, clients are encouraged to make publicly available periodic reports on their environmental and social sustainability. Grievance mechanisms are required to receive and facilitate the resolution of concerns and grievances from affected communities about the client’s environmental and social performance. According to PS 1, grievance mechanisms should: • be scaled to the risks and adverse impacts of the project; • have affected communities as its primary user; • seek to resolve concerns promptly, using an understandable and transparent consul- tative process that is culturally appropriate and readily accessible; • be at no cost and without retribution to the party that originated the issue or concern; and • not impede access to judicial or administrative remedies.

The client should inform the affected communities about the mechanism in the course of the stakeholder engagement process. Finally, PS 1 requires clients to provide periodic reports to the affected communities: • describing progress of the implementation of the project action plans on issues that involve ongoing risk to, or impacts on, affected communities; • addressing issues that the consultation process or grievance mechanism have identified as a concern to those communities; and • communicating updated relevant mitigation measures or actions in cases where the management programme results in material changes in, or additions to, the mitigation measures or actions described in the action plans on issues of concern to the affected communities.

The frequency of these reports will be proportionate to the concerns of affected communities, but not less than annually.

IFC PS 7 PS 7 does the following:

[R]ecognizes that Indigenous Peoples, as social groups with identities that are distinct from mainstream groups in national societies, are often among the most marginalized and vulnerable segments of the population. In many cases, their economic, social, and legal status limits their capacity to defend their rights to, and interests in, lands and natural and cultural resources, and may restrict their ability to participate in and benefit from development.

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Accordingly, one of its objectives is as follows:

To establish and maintain an ongoing relationship based on Informed Consultation and Participation (ICP) with the Indigenous Peoples affected by a project throughout the project’s life-cycle.

Consistently with the above objective, PS 7 requires clients to do the following: • identify, through an environmental and social risks and impacts assessment process, all communities of indigenous peoples within the project area of influence who may be affected by the project; • identify the nature and degree of the expected direct and indirect economic, social, cultural (including cultural heritage) and environmental impacts on them; • avoid, where possible, adverse impacts on affected communities of indigenous peoples; • where alternatives have been explored and adverse impacts are unavoidable, minimise, restore or compensate, or both, for these impacts in a culturally appropriate manner commensurate with the nature and scale of such impacts and the vulnerability of the affected communities of indigenous peoples; • develop actions with the ICP of the affected communities of indigenous peoples and contain such actions in a time-bound plan, such as an Indigenous Peoples Plan, or a broader community development plan with separate components for indigenous peoples; and • undertake an engagement process with the affected communities of indigenous peoples as required in PS 1.

The engagement process should include the following: • stakeholder analysis and engagement planning; • disclosure of information; • consultation; and • participation, in a culturally appropriate manner.

In addition, the engagement process should do the following: • involve indigenous peoples’ representative bodies and organisations (eg, councils of elders or village councils), as well as members of the affected communities of indigenous peoples; and • provide sufficient time for indigenous peoples’ decision-making processes.

ILO 169 and indigenous consultation The ILO has made clear that ‘the establishment of appropriate and effective mechanisms for the consultation of indigenous and tribal peoples regarding matters that concern them is the cornerstone of Convention No. 169.’16

16 Indigenous and Tribal Peoples’ Rights in Practice. A Guide to ILO Convention No. 169, paragraph 5.1, page 59.

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Article 6 of ILO 169 provides that governments have a specific duty to consult indigenous peoples, through appropriate procedures, and in particular through their representative institutions, whenever consideration is being given to legislative or administrative measures that may affect them directly. Article 6 goes on to say that the consultations carried out in application of the latter, shall be undertaken in good faith and in a form appropriate to the circumstances, with the objective of achieving agreement or consent to the proposed measures. However, ILO 169 further establishes a specific duty to consult relating to the development of mining activities:

In cases in which the State retains the ownership of mineral or sub-surface resources or rights to other resources pertaining to lands, governments shall establish or maintain procedures through which they shall consult these peoples, with a view to ascertaining whether and to what degree their interests would be prejudiced, before undertaking or permitting any programmes for the exploration or exploitation of such resources pertaining to their lands. The peoples concerned shall wherever possible participate in the benefits of such activities, and shall receive fair compensation for any damages which they may sustain as a result of such activities.17

Therefore, in countries where the state is the owner of mineral resources, the government must consult indigenous peoples before authorising exploration or exploitation activities of such resources ‘pertaining to their lands’. The latter provision should not be read in isolation but rather in connection with ILO 169’s general duty to consult, as outlined in article 6. The key issue, then, is to assess whether the implementation of article 6’s general duty to consult is able to meet the specific consultation duty set out in article 15 – an assessment that can only be done case by case. The duty to consult set forth in article 6 comprises the following elements: • carried out by governments; • prior to the issuance of an administrative or legislative measure; • carried out whenever consideration is being given to legislative or administrative measures that may affect indigenous peoples directly; • carried out through appropriate procedures; • carried out through indigenous peoples’ representative institutions; • undertaken in good faith and in a form appropriate to the circumstances; and • carried out with the objective of achieving agreement or consent.

Concerning the nature of consultation, the ILO’s Committee of Experts has concluded that the obligation to consult under ILO 169 was intended to mean the following: • Good faith and appropriate procedures: • ‘Consultations must be formal, full and exercised in good faith; there must be a genuine dialogue between governments and indigenous and tribal peoples char- acterized by communication and understanding, mutual respect, good faith and the sincere wish to reach a common accord.’

17 ILO 169, article 15, No. 2.

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• ‘Appropriate procedural mechanisms have to be put in place at the national level and they have to be in a form appropriate to the circumstances.’ • ‘It is clear from the above that pro forma consultations or mere information would not meet the requirements of the Convention.’ • Representative institutions: • ‘Consultations have to be undertaken through indigenous and tribal peoples’ representative institutions as regards legislative and administrative measures.’ • Objective of achieving agreement or consent: • ‘Consultations have to be undertaken with the objective of reaching agreement or consent to the proposed measures.’ • ‘Consultations do not imply a right to veto, nor is the result of such consultations necessarily the reaching of agreement or consent.’18

FPIC As a community engagement dialogue standard, FPIC has different enunciations across international norms of behaviour. The following, which are more relevant to community engagement in the context of mining activities, will be reviewed: • UNDRIP; • ILO 169; • IFC PS 7; and • ICMM's position statement ‘Indigenous peoples and mining’.

UNDRIP UNDRIP’s article 32, No. 2 provides as follows:

States shall consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free and informed consent prior to the approval of any project affecting their lands or territories and other resources, particularly in connection with the development, utilization or exploitation of mineral, water or other resources.

Under UNDRIP, therefore, FPIC requires states to consult and cooperate in good faith with the indigenous peoples concerned. Consultation and cooperation must be carried out through the indigenous peoples’ own representative institutions; the purpose of the consultation is to achieve FPIC. Consultation and cooperation must be carried out prior to the approval of any project affecting indigenous peoples’ lands or territories, and other resources. Consultation and cooperation in order to obtain FPIC for such projects must be carried out particularly in connection with the development, utilisation or exploitation of minerals, water or other resources.

18 Committee of Experts on the Application of Conventions and Recommendations, General Observation 2010/81, page 10.

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Commenting on FPIC, the United Nations Global Compact has clarified as follows:

Consultation and consent are separate but related concepts. FPIC implies a decision-making right to either permit, agree to a modified version, or to withhold consent to a project or activity. While a business should always engage in meaningful consultation with indigenous peoples before commencing activities that impact on their rights, and during the project lifecycle, FPIC is legally required in certain circumstances.19

One such circumstances is the hypothesis of article 32.

ILO 169 ILO 169’s general standard is that consultation with indigenous peoples shall be undertaken with the objective of achieving agreement or consent to proposed measures. The ILO’s Committee of Experts reinforces this standard and observes that consultations, therefore, do not imply a right to veto, nor is their result necessarily the reaching of agreement or consent. However, there is one hypothesis where the standard requested by ILO 169 is more demanding, and that is relocation or resettlement. Article 16 provides a set of rules when relocation of indigenous peoples is considered. Subject to the following rules, the peoples concerned shall not be removed from the lands that they occupy: • in cases where relocation is considered necessary as an exceptional measure, such relocation shall take place only with their free and informed consent; • where their consent cannot be obtained, such relocation shall take place only following appropriate procedures established by national laws and regulations, including public inquiries where appropriate, which provide the opportunity for effective representation of the peoples concerned; • whenever possible, concerned indigenous peoples shall have the right to return to their traditional lands, as soon as the grounds for relocation cease to exist; • when such return is not possible, as determined by agreement or, in the absence of such agreement, through appropriate procedures, these peoples shall be provided in all possible cases with lands of quality and legal status at least equal to that of the lands previously occupied by them, suitable to provide for their present needs and future development; • where the peoples concerned express a preference for compensation in money or in kind, they shall be so compensated under appropriate guarantees; and • persons thus relocated shall be fully compensated for any resulting loss or injury.

IFC PS 7 PS 7 recognises the following:

Affected Communities of Indigenous Peoples may be particularly vulnerable to the loss of, alienation from or exploitation of their land and access to natural and cultural

19 The United Nations Global Compact, The Business Reference Guide to the UN Declaration on the Rights of Indigenous Peoples, page 25.

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resources. In recognition of this vulnerability, in addition to the General Requirements of this Performance Standard, the client will obtain the FPIC of the Affected Communities of Indigenous Peoples in the circumstances described in paragraphs 13–17 of this Performance Standard.

FPIC under PS 7 is as follows: • it builds on and expands the process of ICP described in PS 1 and will be established through good faith negotiation between the client and the affected communities of indigenous peoples; • it applies to project design, implementation and expected outcomes related to impacts affecting the communities of indigenous peoples; • when any of the above circumstances apply, FPIC requires clients to engage external experts to assist in the identification of the project risks and impacts; and • it requires clients to document (i) the mutually accepted process between the client and affected communities of indigenous peoples, and (ii) evidence of agreement between the parties as to the outcome of the negotiations. FPIC does not necessarily require unanimity and may be achieved even when individuals or groups within the community explicitly disagree.

Circumstances requiring FPIC are the following: • impacts on lands and natural resources subject to traditional ownership or under customary use; • relocation of indigenous peoples from lands and natural resources subject to traditional ownership or under customary use; and • impacts on critical cultural heritage that is essential to the identity, or cultural, ceremonial or spiritual aspects of indigenous peoples’ lives.

Impacts on lands and natural resources subject to traditional ownership or under customary use According to PS 7, when adverse impacts can be expected from projects located on lands traditionally owned by or under the customary use of indigenous peoples, or projects that commercially develop natural resources on such lands, clients are required to do the following: • avoid and otherwise minimise the area of land proposed for the project, documenting efforts to that purpose; • avoid and otherwise minimise impacts on natural resources and natural areas of importance to indigenous peoples, documenting efforts to that purpose; • identify and review all property interests and traditional resource uses prior to purchasing or leasing land; • assess and document resource use of affected communities of indigenous peoples without prejudicing any of their land claims, specifically considering the role of women in the management and use of said resources; • ensure that affected communities of indigenous peoples are informed of their land rights under national law, including any national law recognising customary use rights; and

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• offer affected communities of indigenous peoples compensation and due process in the case of commercial development of their land and natural resources, together with culturally appropriate sustainable development opportunities, including providing land-based compensation or compensation-in-kind, and ensuring continued access to natural resources, among other requirements detailed in PS 7.

Relocation of indigenous peoples from lands and natural resources subject to traditional ownership or under customary use PS 7 requirements when relocation is considered are the following: • clients are required to consider feasible alternative project designs to avoid the relocation of indigenous peoples from communally held lands and natural resources subject to traditional ownership or under customary use; • if such relocation is unavoidable, the client will not proceed with the project unless FPIC has been obtained; • any relocation of indigenous peoples will be consistent with the requirements of PS 5; and • where feasible, the relocated indigenous peoples should be able to return to their traditional or customary lands, should the cause of their relocation cease to exist.

Impacts on critical cultural heritage The third hypothesis where PS 7 requires FPIC to be obtained is where a project may have significant impacts on critical cultural heritage that is essential to the identity, or cultural, ceremonial or spiritual aspects of indigenous peoples’ lives. In such cases, PS 7 prescribes the following: • priority will be given to the avoidance of such impacts; • where significant project impacts on critical cultural heritage are unavoidable, the client will obtain the FPIC of the affected communities of indigenous peoples; and • where a project proposes to use the cultural heritage, including knowledge, innovations or practices, of indigenous peoples for commercial purposes, the client must do the following: • inform the affected communities of indigenous peoples of (i) their rights under national law, (ii) the scope and nature of the proposed commercial development, (iii) the potential consequences of such development and (iv) obtain their FPIC; and • ensure fair and equitable sharing of benefits from commercialisation of such knowledge, innovation or practice, consistent with the customs and traditions of the indigenous peoples.

ICMM Pursuant to ICMM’s position statement ‘Indigenous peoples and mining’, in addition to existing commitments under the ICMM Sustainable Development Framework, member companies commit to work to obtain the consent of indigenous communities under specific circumstances.

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FPIC requirements under this position statement may be described as follows: • the requirement to ‘work to obtain the consent’ of indigenous communities, which applies to: • new projects and changes to existing projects; and • projects that are located on lands traditionally owned by or under customary use of indigenous peoples and are likely to have significant adverse impacts on indigenous peoples, including where relocation of indigenous peoples or significant adverse impacts on critical cultural heritage are likely to occur; • consent processes should focus on reaching agreement on the basis for which a project (or changes to existing projects) should proceed; • consent processes should neither confer veto rights to individuals or subgroups nor require unanimous support from potentially impacted indigenous peoples (unless legally mandated); and • consent processes should not require companies to agree to aspects not under their control.

Further, according to ICMM, FPIC comprises a process and an outcome. FPIC as a process means that indigenous peoples are: • able to freely make decisions without coercion, intimidation or manipulation; • given sufficient time to be involved in project decision-making before key decisions are made and impacts occur; and • fully informed about the project and its potential impacts and benefits.

As an outcome, FPIC entails that indigenous peoples ‘can give or withhold their consent to a project, through a process that strives to be consistent with their traditional decision-making processes while respecting internationally recognized human rights and is based on good faith negotiation’. A final note must be made on the meaning of the requirement ‘work to obtain consent’. ICMM recognises that if consent is not forthcoming, despite the best efforts of all parties, the government might determine that a project should proceed, and specify the conditions that should apply. If that is the case, ICMM provides that members will determine whether they ought to remain involved with the project.

Agreement making as an activity deriving from FPIC IFC PS 7 PS 7 provides that FPIC ‘will be established through good faith negotiation between the client and the affected communities of indigenous peoples’ and further adds that ‘the client will document (i) the mutually accepted process between the client and affected communities of indigenous peoples and (ii) evidence of agreement between the parties as the outcome of the negotiations.’ The link between FPIC and agreement making is determined by the following elements: • FPIC must be established through good faith negotiation between the client and the affected communities of indigenous peoples; • the client must document as follows: • the mutually accepted process with the affected communities of indigenous peoples; and • evidence of agreement between the parties as the outcome of the negotiations.

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ICMM’s position statement and Good Practice Guide ICMM’s position statement, 'Indigenous peoples and mining', when describing the members’ commitment in working to obtain the consent of indigenous communities, states the following:

Consent processes should focus on reaching agreement on the basis for which a project (or changes to existing projects) should proceed.

The Good Practice Guide’s focus is ‘the use of negotiated agreements to define and regulate relations between mining companies and indigenous communities’.20 Along the same lines, the Good Practice Guide states the following:

Negotiated agreements between companies and indigenous groups . . . provide a means through which a community’s consent for a project, and the terms and conditions of projects negotiated through the process of FPIC, can be formalized and documented.21

And as follows:

There is now broad recognition among the leading companies in the global mining industry that strong, but flexible agreements with indigenous groups are mutually beneficial for both companies themselves and the communities they operate in. Agreements also provide a governance mechanism to define roles and responsibilities which can support engagement and dialogue into the future.22

For indigenous peoples, agreement-making processes can be a positive step in redefin- ing their relationship with mining companies operating on their lands. The joint appre- ciation of both the position statement and the Good Practice Guide makes clear that for the ICMM consent processes should focus on reaching agreements that: • refer to the basis for which a project (or changes to existing projects) should proceed; • are signed between companies and indigenous groups; • provide a means through which a community’s consent for a project can be formalised and documented (including the terms and conditions of projects negotiated through the process of FPIC); and • provide a governance mechanism to define roles and responsibilities, which can support engagement and dialogue into the future.

Finally, it must be added that some national legislation requires project developers to negotiate and subscribe agreements with the indigenous peoples concerned, in which case agreement making as a specific stakeholder activity is mandatory.23

20 Good Practice Guide, paragraph 4.1. 21 Good Practice Guide, paragraph 2.5. 22 Good Practice Guide, Chapter 4, Introduction, page 39. 23 One example of this is the Nunavut Land Claims Agreement Act of the Nunavut province of Canada, whose article 26 provides that proponents of development projects located in lands owned by the Inuit shall negotiate and subscribe an ‘Impact Benefit Agreement’ with the corresponding Inuit body.

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Social Licence and the Rule of Law

Luis E Lucero1

This chapter is intended as an overview of how the notion of social licence was born (as explained by Mr James Cooney in his article, ‘Reflections on the 20th anniversary of the term “social licence”’),2 and how and why, in countries with certain constitutional traditions, it has played a role that can be found contradictory to the rule of law, as the notion of social licence has eroded some capital constitutional principles. These reflections will have a particular focus on Argentina. This chapter starts with a brief reference to Argentine history, so that a principle embodied in the Argentine Constitution of 1853 will have some factual background; it is easier to understand the rationale of any law if the circumstances surrounding its creation and adoption are known. What is today the Argentine territory had been part of the Spanish kingdom since the late sixteenth century. The confusion and disorder that the invasion of the Iberian peninsula by Napoleon Bonaparte – who replaced the King of Spain with his brother Joseph Bonaparte in 1808 – created in the Spanish kingdom expanded to the Spanish colonies in the western part of South America, including what had been since 1776 the viceroyship of the Río de la Plata, more or less the current Argentine territory. In short, the American Spaniards claimed that a system of governmental boards was to be put in place to conduct the governmental affairs of a particular region; as had occurred in Spain, where several governmental boards had been created (the most prom- inent being the one in Seville). In 1810, a sequence of events was put in motion so that six years later, in July 1816, the independence of a new country was declared. From May 1810 (when a governmental board was created in Buenos Aires), for a period of 43 years, what today is known as Argentina endured varying degrees of turmoil, from ineffective local, provincial and central governments to, cruel and bloody civil war.

1 Luis E Lucero is partner at Marval O’Farrell & Mairal. 2 Published in the Journal of Energy & Natural Resources Law, edited by the IBA, May 2017.

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After those 43 years, a Constitution was finally adopted in May 1853. It was drafted following the model of the Constitution of the United States, adopting a federal system consistent with the tradition inherited from the Spanish crown, a dual-chamber National Congress, a judiciary branch headed by a National Supreme Court and the administration of national affairs entrusted to a president. Section 22 of the Constitution, included in the original version and maintained after several amendments (the last one in 1994), sets forth the following:

The people neither deliberate nor govern except through their representatives and authorities established by this Constitution. Any armed force or meeting of persons assuming the rights of the people and petitioning in their name, commits the crime of sedition.3

The reason for discussing the historical context of this fundamental principle is to emphasise that the drafters of this rule were influenced by decades of political violence preceding the moment at which they were adopting the fundamental rules to govern the political affairs of the country. The drafters of the Constitution rightly felt the need to set a very clear principle: that it was through the action of organised authorities (not only National Congress, but also provincial authorities) that the people of the country were to discuss, argue and adopt the laws that would govern their lives and businesses. They went on to adopt the notion of sedition, a crime – punished with imprisonment – for the ‘meeting of persons assuming the rights of the people and petitioning in their name’. This rule does not suppress the right to petition (section 14), or of free speech and free press (section 32), as scholars have noted,4 but rather it emphasises the way in which the will of the people must be channelled. It is the system of a representative republic, in which there is a delegation of the power to deliberate and adopt the law as a logical consequence of such deliberations. To what extent the respect of this principle makes a paramount difference in the way a civil society conducts its affairs is easy to note if it is remembered that it was not only during 1810 to 1853 that Argentina experienced violent times. In 1930, 1955, 1966 and 1976 the country suffered military coups d’état, each of which started a military government that lasted for several years. In addition, as in many other countries in the region, the effects of the Cold War were also felt by the presence of armed groups applying terrorist tactics and actions, which prompted reactions from other armed groups that were sometimes supported in the shadows by such governments, in a spiral of violence that took many years to overcome. The principle adopted in section 22 of the Constitution is a pivotal difference between an organised civil society and chaos. In other words, it is a cornerstone of the rule of law.

Social licence What it meant, what it means The expression ‘social licence’ has gained, in 21 years, a predominant role in any discussion about the impact of the mining industry in any given community, or whenever

3 http://pdba.georgetown.edu/Constitutions/Argentina/argen94_e.html#firstpartch1. 4 M A Gelli, Constitucion de la Nacion Argentina Comentada y Concordada, T. I, LL, pg. 383.

110 © Law Business Research 2019 Social Licence and the Rule of Law the interaction of a mining company or project and the surrounding communities is analysed. It is fair to say that the current, global and expanded notion is that social licence is an essential condition, something that a project simply cannot afford not to have. To some degree, social licence is something that seems to be stronger, and far more important than any legal requirement to build and operate a mining facility. Social licence is not a legal concept, but it seems to have, however, a weight heavier than law itself, even in legal circles. In fact, it has gained such a status that it sometimes shadows the existence of legal licences. Now, it seems correct to say that to many observers, stakeholders, non-governmental organisations (NGO) and media, this is a situation that is not only unsurprising but, even more, is valuable: how could it be considered unfavourable that a mining operation needs to have the acquiescence of those who will be impacted in their daily lives more than anyone else? That any given mining project could not go forward in spite of having been granted its various governmental licences owing to community opposition might be perceived as a triumph of social awareness about environmental and other perils involved in mining. This is, indeed, a widespread view and a legitimate one. However, it is also true that with any mining operation frustrated by the failure to gain social licence, there are jobs that are not created, revenues for workers that will not exist, revenues in taxes that will not be collected and value creation for shareholders that will not occur. From a traditional legal standpoint, this approach creates the following problems: • Social licence is undefined. There is no official source of the concept, there is no authority defining it; we know its meaning, more or less, but such a notion, even when shared, is by no means a definition. • Who grants it? Most people would say that social licence is granted by the community, but ‘the community’ is not a valid answer, as it is very rare that in any given community something or someone is empowered to act on behalf of the community except, precisely, for those authorities that are legally created and maintained – but then one is within the notion of ‘legal licences’, which is not covered by the concept of social licence. • For how long is it granted? It seems possible to say that we know when it exists and when it does not exist, but there are a lot of grey areas that indicate that we simply do not know for how long an operation enjoys it. • What are the requirements to keep it in good standing? Similar to the term of its existence, the conditions that are to be met to keep it in good standing are unknown. One may feel intuitively whether the social licence is still in place or if it has been lost. But there is no hard fact or measure to know for certain.

And yet, in spite of all the problems that mining companies’ executives and officers – and their financiers and advisers – are faced with, the concept is solidly applied. These problems have been puzzling for some time. Something felt wrong: being so vague, its limits being so blurred, why is this notion so generally, vastly applied? Should lawyers not do something to bring some clarity to the problem? And even further, are the licences that are socially required for a mine to be built and operated not included in the law, whether national, provincial or even municipal? If the law does not contain all the

111 © Law Business Research 2019 Social Licence and the Rule of Law licences that are socially needed – if the law fails to catch certain licences – how can this other licence be legally dealt with? In May 2017, the Journal of Energy & Natural Resources Law of the International Bar Association5 published a brief commentary entitled ‘Reflections on the 20th anniversary of the term “social licence”’. The particular value of this piece relied on the fact that the author, Mr Cooney, was the creator of the expression ‘social licence’, and that the article was the first time he made public his personal account of the events that led to the creation of the term; such account was written and published in light of the 20th anniversary of the moment when he first used the expression. The most interesting element of this article was that Mr Cooney expressed his surprise at the evolution of the concept since he first used it. It was at a presentation he made in his capacity, at the time, as vice president of international government affairs with Placer Dome Inc during a World Bank gathering held in Washington, DC, in March 1997. The gathering was called ‘Roundtable on Mining: The Next 25 Years’. Attendants included representatives of mining companies and NGOs, academia and other experts in various fields. Mr Cooney was a political risk expert, primarily responsible for managing his company’s political risk exposure in developing countries. He was called to speak about the ‘main political risk challenges that the mining sector would face in the developing world during the coming quarter century’. After several years of experience working with developing countries, Mr Cooney had come to the conclusion that managing political risk for mining projects consisted of two ‘tracks’. First, dealing with the permits that every government requires to allow the mining projects to operate, including permits for health and safety, and environmental issues, for which dealing with what is known as ‘government take’ may be included. Where applicable, these permits would also include stabilisation agreements, devised to guarantee to the investor (most likely an investor foreign to the country where the resource is located) that the tax and royalties regime under which the decision to build and operate the project was adopted would survive for the life of the project without amendments that would alter the basic economic parameters – or at least during a period long enough to guarantee repayment of the investment. The second track of managing political risk is, in Mr Cooney’s view, the effect of globalisation, which caused local communities to gain unprecedented levels of knowledge about the issues they were facing with a particular project, as much as support in their negotiations with the relevant company or companies from the NGO community and other sectors sympathetic to their position. The two phenomena combined dramatically increased the bargaining power of local communities to levels that were unknown at the time. From that observation, he drew the following conclusions:

The objective of conventional political risk management at the national level was to obtain and sustain a ‘government permit’ to operate. What was the objective of political risk management focused on local communities and their global allies? It could not

5 Journal of Energy & Natural Resources Law, IBA, Vol 35 May 2017, pp. 197–200. To see an interview with James Cooney where he tells the story that also went in print in the quoted article, go to https://www.youtube.com/watch?v=BXRecv6oh8g.

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be called a ‘community permit’, as that would have implied a non-existent local legal authority, and would have overlooked the role of the international allies of communities. So I decided to describe the objective of local political risk management as a ‘social licence’, a term that had a nice verbal parallelism with ‘government permit’ but was necessarily more nebulous. As with political risk management at the national level, a mining company needed to maintain an ongoing positive relationship with local communities and their allies by demonstrating that they were acting in a manner consistent with local expectations and demands. Failure to maintain government support could lead to the suspension of the mining permit. Similarly, failure to maintain community support could lead to the suspension of the ‘social licence’. That was what I intended the term to emphasise. It was simply an analogy or metaphor that highlighted the equivalence of the political risk management challenges at the community level with those at the governmental level. In retrospect, I correctly foresaw that political risk management by mining companies during the years after 1997 would follow two separate tracks, one focused on national governments and the other on communities. What I failed to anticipate was that the term ‘social licence’, which I had used simply to illustrate the reality of this two-track process, would become a major reference point in the discussion about the relationship between mines and communities.

Further on he adds the following:

[I] remain surprised by how much attention the concept has attracted. For me, the term was descriptive of a reality that mining companies faced on the ground. Since then, the term has evolved into a prescriptive norm that mining companies should endeavour to achieve. . . . ‘Social licence’ has been viewed positively by some as a useful guide and negatively by others as a harmful impediment to effective decision-making about major industrial projects. Apparently, that is the peril inherent in a metaphor.

This article is impressive for two reasons. First, it was of an intellectual honesty that is not frequently seen; and second, because it somehow came to prove that there was something wrong, if not with the notion, at least with the intensity and widespread use the term had gained. The term acquired a life of its own, beyond the intent of its creator. A metaphor had become a crucial requirement that meant, for a mining company regarding a particular project, the difference between success and failure.

Is social licence consistent with the rule of law? Bringing together the pieces that have been presented so far there is (i) a long history of struggling to make the rule of law the norm rather than the exception (referring to Argentine history; but Ihering’s The Struggle for Law, published in 1872, suggests that the concern is older and universal); (ii) a constitutional norm whereby attempting to express the will of the people and not being a representative elected following the applicable law is – as harsh as it may seem and sound – a crime; and (iii) a coexisting principle under which for building and operating a mining project a company needs the social licence of the community, understanding that in such context social licence does not mean the

113 © Law Business Research 2019 Social Licence and the Rule of Law legal permits, licences and other approvals such community might have formally given to the project through the governmental bodies (local executive branch or legislature) because, by definition, social licence is different from a legal licence. The point this chapter intends to make is that these three elements do not work well together. In other words, if understood and applied as if it was a strict principle, social licence – element (iii) – may very well work against elements (i) and (ii). Argentina gives some examples of that. Mining activity has been legislated by the national code adopted by the National Congress following a mandate in what is now section 75(12): it is within the authority of the National Congress to adopt a code on mining. As per such norm, the mining code was adopted in the late nineteenth century and it has set forth the principle that mining activity is of public importance. This notion has some legal and practical consequences as it is the ground for the code mandating that easements for mining purposes are to be imposed on surface owners if the project’s needs so indicate. In summary, the duly elected representatives of the people, gathered in the National Congress in their role as legislators, have decided that Argentina shall favour the mining industry in the understanding that it is much needed for the progress of the country. This is the law. In spite of what the law mandates (ie, mining is a fundamental activity and nobody other than the duly elected officers may represent the people), several communities around the country have decided that they do not support mining. In 2002, in a town called Esquel, located in the Andean lake region in Patagonia, the local community started a series of actions that eventually led to mining company Meridian Gold – a public company whose shares plummeted – suspending all activities in the project. Actions by members of the community triggered other similar situations in other locations. No a la Mina, an NGO, claims on its website6 that 100 communities around the country oppose mining projects. Under the social licence standard, the Esquel project could not proceed. In fact, it never has, at least so far. The reason was that it clearly lacked social licence; the company’s decision to build and operate was inconceivable. Under the rule of law standard, the company had all permits in place. It was entitled to go ahead. But the social licence principle prevailed. This case was a leading one. Whether or not the number of 100 communities that No a la Mina references on its website is correct or not, the fact is that the opposition to mining projects has expanded. Activism has replaced deliberation in the appropriate venues, and legislative debate. It is true that activism has developed, at some points and under certain circumstances, into law. Where that has happened the rule of law is saved. But in many circumstances mere activism is what stops a project. And where those situations occur in spite of the existence of governmental valid licences, permits and approvals, it is clear that the rule of law has suffered. The issue is that activism has been legitimised by the social licence notion.

6 https://noalamina.org/preguntas-frecuentes/preguntas-esquel/item/2724-como-se-desarrollo- -el-conflicto-minero-en-esquel.

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The following is relevant in supporting the view that the rule of law has somehow been eroded by social licence when social licence is given undue importance:

But the Rule of Law is not just about government. It requires also that citizens should respect and comply with legal norms, even when they disagree with them. When their interests conflict with others’ they should accept legal determinations of what their rights and duties are. Also, the law should be the same for everyone, so that no one is above the law, and everyone has access to the law’s protection. The requirement of access is particularly important, in two senses. First, law should be epistemically accessible: it should be a body of norms promulgated as public knowledge so that people can study it, internal- ize it, figure out what it requires of them, and use it as a framework for their plans and expectations and for settling their disputes with others. Secondly, legal institutions and their procedures should be available to ordinary people to uphold their rights, settle their disputes, and protect them against abuses of public and private power. All of this in turn requires the independence of the judiciary, the accountability of government officials, the transparency of public business, and the integrity of legal procedures.7

Also, as follows, regarding the practical implications of this matter in the decision-making process:

Predictability is often cited as a Rule-of-Law virtue. In his well-known recent book on the subject, Tom Bingham indicated that one of the most important things people needed from the law that governed them was predictability in the conduct of their lives and businesses. He quoted Lord Mansfield to the effect that: [i]n all mercantile transactions the great object should be certainty: . . . it is of more consequence that a rule should be certain, than whether the rule is established one way rather than the other. (Lord Mansfield in Vallejo v Wheeler (1774) 1 Cowp. 143, p. 153 (cited by Bingham 2010: 38).) [N]o one would choose to do business . . . involving large sums of money, in a country where parties’ rights and obligations were undecided. (Bingham 2010: 38.) [A]nd knowing that one can count on the law’s protecting property and personal rights gives each citizen some certainty about what he can rely on in his dealings with other people. The Rule of Law is violated, on this account, [. . .] when the norms that are applied by officials do not correspond to the norms that have been made public to the citizens or when officials act on the basis of their own discretion rather than norms laid down in advance. If action of this sort becomes endemic, then not only are people’s expectations disappointed, but increasingly they will find themselves unable to form expectations on which to rely, and the horizons of their planning and their economic activity will shrink accordingly.8

7 Waldron, Jeremy, ‘The Rule of Law’, The Stanford Encyclopedia of Philosophy (Fall 2016 Edition), Edward N Zalta, https://plato.stanford.edu/entries/rule-of-law/. 8 idem.

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Conclusion Mining, like other extractive industries, has been under intense scrutiny for various reasons, at different levels, in the past 50 years. In some provincial jurisdictions within Argentina, the risks (real or perceived) associated with open pit mining and the use of cyanide has led those jurisdictions to ban either one or both. Whether right or ill decisions from a political, economic or constitutional standpoint, the existence of laws restricting mining practices or the use of certain chemicals is part of the legal landscape and, as such, companies must deal with it and, to a point, accept it. Companies affected by such laws may take actions to ensure that policy and lawmakers are well informed and that decisions are adopted as a result of a process conducted rationally. Where appropriate, companies may take legal actions and seek a remedy from the legal system as devised by constitutional rules. In practice, however, the will to ban mining, as much as the opposition to a particular project, is often channelled through other means. This is the case in countries in which the legal institutions are, for a variety of reasons, weak. Reality shows that, where legislative bodies and the judiciary are regarded with disre- spect, social demands are made, bypassing republican institutions. Even violent means are sometimes used. Not only to prevent violence, but to simply contribute to social advancement in developing nations, the importance of the role of law in communities’ lives can never be exaggerated. In Mr Cooney’s words, ‘the term (social licence) has evolved into a prescriptive norm that mining companies should endeavour to achieve.’ The concern, however, is that social licence might have helped to undermine the importance of the rule of law, which as Professor Waldron described ‘[i]s not just about government. It requires also that citizens should respect and comply with legal norms, even when they disagree with them. When their interests conflict with others’ they should accept legal determinations of what their rights and duties are’.

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Mining Closure

Adolfo Durañona and Tomás Eduardo Trusso Krause Mayol1

This chapter is a comparison of various countries’ legislation, including requirements to ensure companies have the financial capacity to assume the costs related to closure and remediation.

Introduction Mining is one of the economic sectors that contributes the most to world GDP, not only in developed countries but also in developing countries.2 Moreover, mining is one of the sectors with the greatest capacity for both direct and indirect employment. In developed countries such as Australia and Canada, mining accounts for 10 per cent of their GDP, which sometimes doubles, or exceeds by 50 per cent, the GDP of developing countries. Mining also constitutes 10 per cent of GDP in developing countries such as Chile and Peru. However, in countries like Argentina, it amounts to 4 per cent of the GDP. When dealing with mines closures and establishing plans of action, analysing the impact of mining on each country’s economy and considering the economic differences of each country is of the utmost importance.3 In light of the foregoing, it may be concluded that the greater the impact on the GDP, the greater the dedication and rigour must be with which each country deals with mine closures. But often, the lack of specific regulation with respect to environmental, social and economic measures linked to the closure of a mining project prevents the growth of

1 Adolfo Durañona is a principal partner and Tomás Eduardo Trusso Krause Mayol is an associate at Baker McKenzie. 2 Reference to countries as developed or developing is made following UN human development statistics and standards. 3 References to GDP figures are approximate and are based on national statistics published on relevant governmental websites.

117 © Law Business Research 2019 Mining Closure the mining sector owing to fears of environmental impact and, consequently, its effect on the GDP. A failed mine closure discourages both citizens and states that have no motivation or support to encourage mining development in their regions and that become responsible for an environmental liability that is difficult to deal with. Environmental impact is considered, in many countries, to be one of the major drawbacks of mining. Still, measures adopted by those countries in this regard have not always been appropriate – most often, they were way below international standards or even non-existent. Sometimes, this situation led to a total prohibition of the mining activity, which consequently prevented the economic and social development related to it. In contrast, some countries have updated legal regimes based on past experience, which foster the creation of successful closure guidelines with constant state monitoring, vesting in the companies the obligation to update their plans and provide one that adjusts to meet high international standards. The purpose of this chapter is not to compare systems from different jurisdictions, but to cast light on the main challenges that usually arise in connection with mine closures. It will also analyse the most effective solutions or processes available in different jurisdictions aimed at helping states, companies and individuals work together and arrive at a successful closure.

Good-practice mining closure principles Most authors, legislation and guidelines from countries such as Canada and Australia, agree on the fundamental principle that mine closure plans must be part of the mining project from its beginning, allowing a successful rehabilitation and regeneration of the area. In fact, all specific legal regimes indicate that mine closures are processes that take place during the useful life of a mine. Mine closure should be considered even before its execution, and while the mining project is still operative. It includes both rehabilitation tasks that take place during the operation of the mine, which mitigate the effects of the mining activity while being performed, and post-closure activities, which are mainly monitoring activities. Taking this into consideration, the following are a series of principles that make mine closures successful: • the existence of adequate legal regimes that permit the successful closure and establish a rehabilitation process that includes not only environmental but also socio-economic elements; • continuous state monitoring and assistance activities for the specific aspects of each mining project; • the obligation of companies of cost reporting and updating the provision of closure plans; • the existence of financial guarantees, which assure that the closure cost can be covered without making the state and the citizens liable for the damage; and • total transparency and publicity of the companies’ closure processes and plans.

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As pointed out by the Mineral Policy Institute, an Australian international civil organisation, closure processes may be either a ‘successful closure’ or a ‘legacy’.4 Australia, one of the countries with the highest mining activity and longest mining history in the world, has vast experience in the negative legacy that some projects have left owing to an incorrect mine closure, affecting the environmental and socio-economic situation of the area in which they operated. In this respect, there arose the need to promote basic principles and specific solutions in monitoring, updating and financing issues, which shall allow the creation of comprehensive legal frameworks appropriate for other countries’ realities.

Legal regimes Challenges and solutions Requiring companies to repair the damage is not enough to have successful mine closures:5 specific regimes with clear objectives are needed. Below, the main challenges that each of the selected jurisdictions face and the solutions provided will be identified.

Argentina There are no specific national regulations in Argentina for mine closures. The Mining Code only establishes that the environmental report that companies must file with the mining authorities, which must be approved prior to the commencement of the activities, must include the ‘prevention, mitigation, rehabilitation, restoration or regeneration of the altered environment, as applicable’. Some provincial jurisdictions6 such as Catamarca and San Juan have attempted to determine some fundamental principles for mine closures, and have even attempted to regulate them, but have not been successful yet. Argentina established a preliminary control where it is necessary, in order to obtain an environmental impact approval, to specify which measures will be adopted in case of closure. Nevertheless, the plans usually only refer to technical aspects of the closure (treatment of residues, construction dismantling and water quality monitoring, among other rehabilitation activities) without establishing deadlines, costs or estimates, etc. This (i) hinders the monitoring of the activities by the authorities, (ii) does not create real obligations for the companies because it does not establish progressive compliance with closure plans and cost follow-up, and (iii) does not consider the need to guarantee the financing of the closure plan. The province of San Juan, however, with several gold and silver projects, has been working on a specific bill regarding mine closures, which is aimed at adopting a series of principles that follow international standards. The purpose of the bill is that closure plans include the details of their implementation, the necessary budget, the costs of restor- ing the environmental liabilities and a description of how environmental areas will be

4 Mineral Policy Institute, Roche C and Judd S (2016) Ground Truths: Taking Responsibility For Australia’s Mining Legacies. 5 The ‘polluters pays’ principle is the commonly accepted practice that the one who pollutes must bear the costs of the damage. 6 In Argentina, the national state determines the minimum provisions as regards mining and the environment, but the provinces are able to regulate such provisions, such as procedural conditions for environmental impact report approval.

119 © Law Business Research 2019 Mining Closure rehabilitated. The bill further establishes that the amount necessary for the closure plan must be determined during the project’s useful life, and sets forth state monitoring after the mine closure, which will be funded with the guarantees established in the bill. The debate on this bill in Congress is related to the closure dates of some projects in San Juan.7 This situation will most likely prompt a restructuring of the rest of the provincial legislation, which, if properly done, will generate a solid system applicable to the whole country. Argentina is in the initial stage of developing its mine closure regimes and it should adapt its legislation to meet the environmental and socio-economic standards of more developed countries.

Chile Chile, a country with great mining activity and tradition, has more advanced legislation. In 2011, specific legislation for mine closures caused an important development in mining activity,8 and included a series of principles that are considered to be correct and noteworthy: • concrete criteria for a five-year audit of the closure plan and the creation of an auditor’s registry; • adjustment system for the closure plan; • determination of the way in which the plan will be complied with, which must always be progressive; • establishment of liability criteria in connection with the closures and applicable penalties; • determination of an audit process carried out by the authorities;9 and • establishment of an express and mandatory guarantee system.

All projects are obliged to submit a closure plan that must: • be approved and provide technical information, indicating the project’s useful life; • establish measures for the physical and chemical stability of the place where it will take place; • provide a closure plan cost estimate and measures to be adopted after closure; • establish the amount of the guarantee; • grant the guarantees as required by law (which will be addressed later on); and • establish a promotion programme of the plan for communities.

Finally, Chile has also included a series of guidelines for assisting companies in preparing their closure plans.

7 According to public information, the Gualcamayo mining project is near closure. In addition, underground mine deposit Casposo’s closure is planned for 2023, and Veladero for 2025. 8 Chilean Mining Closure Law 20,551 has been in effect since 11 November 2012, and is published on http://www.sernageomin.cl/cierre-de-faenas-mineras/. 9 The Chilean ‘Servicio Nacional de Geología y Minería’ (SERNAGEOMIN) is the designated authority.

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Canada and Australia Canada and Australia have been working on mining and mine closure challenges – especially since they have experience in projects with both successful and failed closure plans. All Australian states have a specific legal regime for mine closures, and most of them have their own guidelines that serve as an orientation method for creating closure plans and for their execution. An example of this is the 2005 guidelines of the government of Western Australia. Such guidelines are aimed at clarifying all stages of closure plan processes and their content, as well as providing information to companies regarding all the costs that must be taken into consideration. As regards Canada, both its legislation as well as its guidelines are aimed at including all aspects of mine closures, and they state the following: • the closure plan must include the costs and timeline of the closure tasks; • the plan must establish strategies for mitigating the socio-economic impact, and a development plan after closure for employees; • a financial guarantee system must be established; • plans must be revised and updated in order to consider new technologies applicable to the closure; and • there must exist a continuous monitoring process, and a transparent and informed closure process.

Canada has developed a continuous growth system in terms of having more comprehensive closure plans for all affected sectors and constantly updating them. There lies the biggest difference with regimes that remain in the past and do not respond to current needs and innovations. Canada, like many other countries, has examples of mining projects that after their closure have become museums, tourist attractions, scientific centres, recreational areas, parks or agricultural lands.10 A system composed of internal audits and monitoring by the authorities, updates of closure plans by companies, involvement of professionals in different areas and a system of financial guarantees – as we will later analyse – seems to be the way to achieve a successful closure plan.

Financial assurance One of the most important issues of mine closure is the answer to the following question: are mining companies financially sound once mining projects end so as to bear the costs of rehabilitation, restoration and reconstruction of the environment and of the socio-economic status of the affected community? The main related risk is that mines can be closed owing to mineral exhaustion (ie, the end of the mining project’s useful life), or, as in most cases, there may be an unforeseen or premature closure or abandonment of the mining project as a result of abrupt economic changes or other financial or regulatory issues that affect the planned circumstances of the project. Therefore, guidelines must be established on how to protect a country and its community from closures, and

10 INCO’s Creighton Mine in Ontario has become an observatory; a limestone quarry mine in British Columbia is now Butchart Gardens; a coal mine in Alberta is now the Bellevue Underground Mine Museum.

121 © Law Business Research 2019 Mining Closure particularly from abandonments or unforeseen closures upon which, most often, the one that should face closure costs does not have the necessary resources. Next, there will be a brief analysis of the measures taken in different jurisdictions around the world to face this issue. A 2005 study compared the legal regimes of a group of countries such as Australia, Canada and the United States (among others) with the legal regimes of countries located in Africa, South East Asia and Latin America (among others). As regards the first countries, reference was made to the existence of specific legal regimes that include a system of guarantees (bonding procedures) to ensure comprehensive mining closures. In contrast, the other countries, which were mostly developing countries, had no specific legal regimes and did not oblige companies to provide financial guarantees for closure and subsequent monitoring activities. As outlined below, several years later, some jurisdictions made the decision to move forward in regulating the financing of mine closures in accordance with international standards, but there is still room for improvement.

Argentina Argentina has no obligation to mining companies to grant any guarantee or insurance to face the costs of a closure of their mining project. However, it provides that ‘for the purpose of preventing and remedying the alterations that mining activities may cause in the environment, companies shall constitute a special accounting provision for such purpose’ – funds that may be deducted from the tax burden.11 However, as provided by law, the annual amount of such fund will be fixed at the companies’ discretion. As it can be seen, Law 24,196 is not enough to ensure successful closures. However, without specific relation to mining activity, Argentine environmental regulations do provide that the companies performing activities that may generate environmental risks shall obtain environmental insurance. Currently, the only type of insurance is the surety environmental insurance of collective incidence. The relevant authorities are still working on the implementation of other guarantees, such as environmental responsibility insurance, environmental trusts, environmental funds or self-insurance. However, Argentina has faced a new challenge: this kind of insurance cannot be easily obtained in the local insurance market, owing to the difficulties in defining the potential cost and finance of the insurance. Again, the implementation of Law 24,196 is insufficient to ensure successful closures. The alternatives may be easier to obtain, such as self-insurance, which is useful when those performing risky activities are economically and financially solvent. Some Argentine provinces are working on other guarantee or insurance instruments. For instance, the province of San Juan is following international trends as regards bonding systems − as is the case with Chile, Canada and Australia, described below – and has been working on a bill to face this problem. The bill requires mining companies to provide guarantees by means of term deposits, public securities , trust funds, surety policies or the organisation of reciprocal guarantee companies. In addition, the San Juan bill provides that companies must establish an environmental fund amounting to 30 per cent of the aggregate financial guarantee funds.

11 Section 23 of Argentine Law 24,196 (Mining Investments Act).

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Chile In Chile, companies must have in place an instrument that guarantees the value of implementing the closure for the period of the mine’s operation, and following up and monitoring for the post-closure stage. Chile also requires that the guarantee amount be updated and adjusted over time to assure all costs are being covered. Among the guarantees the Chilean law lists we can identify: • sight deposit certificates; • sight guarantee bank statements; • certificates of deposits of less than 360 days; • standby letters of credit issued by specific banks; and • other instruments, including: • assignment of the mineral sales contract entered into with the National Mining Company; • pledge on export return; and • solidary bond of a controlling partner.

As described above, the experience in Chile in the preparation of the law and its implementation has provided some lessons for other jurisdictions.12 One of the main challenges of the law was to define the life of the mining project. The financial guarantee has its roots in this point, considering that it is necessary to determine the reserves that the project has in order to define how long the closing process will last and the amount of the associated costs. The Chilean law defines the life of the mining project as: ‘The calculation that is made based on proven reserves, certified by a Competent Person in Mining Resources and Reserves, in relation to the annual levels of mineral extraction.’ The conflict that Chile had to face was that there were inconsistencies between the term established by this law and the term indicated by permits granted by other environmental authorities that determined a different mine life. This entailed the possibility that if a shorter term of mine life was considered, all expenses associated with the closure will not be adequately covered and guaranteed.

Canada and Australia Canada and Australia lead the list of countries with a more rigorous and deep consideration of what mining closure entails. The concept behind the guarantees system that these countries impose is based on ensuring that the cost of successful rehabilitation can be covered, regardless of the financial or legal issues that the company in charge of the project may have. This guarantee must represent the estimated cost of rehabilitation works, and must be presented at the time of submission of the closure plan. As mentioned above, each of the states of Australia and Canada is responsible for mine closure (eg, Ontario, British Columbia and Manitoba, among others, in Canada; and New South Wales, Western Australia and South Australia, among others, in Australia). The legal regimes of the majority of Canadian and Australian states, as well as the guidelines we mentioned, require the filing of a financial guarantee. For instance, the Ministry of

12 Sanzana E, Campos J and López A (2015), Implementation of the Mine Closure Law in Chile.

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Energy, Northern Development and Mines in Ontario published the following forms of financial assurance on its website:13 • cash; • letter of credit; • bond of a guarantee company; • mining reclamation trust; • pledge of assets; or • any other guarantee acceptable by the applicable authority.

However, both Canada and Australia go a step further and not only determine the obligation to provide these guarantees, but also propose that cost analysis needs to be based on a transparent and verifiable planning of the tasks to be carried out, which allows for the identification of the cost of the closing and post-closing activities. In this case, this aim has been accomplished by issuing guidelines that allow for the establishment of specific responsibilities for companies and monitoring bodies, and fix general principles that cannot be disregarded in any closure plan. For example, the mining closure guideline for Western Australia, as of 2015, from the Department of Mines and Petroleum, makes special reference to these kind of provisions. In this regard, it reads as follows:

The financial provisioning process and methodology has to be transparent and verifiable, assumptions and uncertainties have to be clearly documented, and they have to be based on reasonable, site-specific information and data throughout the life of the project. The closure cost estimates must be regularly reviewed to reflect changing circumstances and levels of risk. This will ensure that the accuracy of closure costs is refined and improved with time, and will assist with management and mitigation of high-risk issues.

Western Australia not only determines the obligation to provide a bond but also to contribute yearly 1 per cent of the annual cost of mine rehabilitation to the Mining Rehabilitation Fund (MRF). The following is set forth by the Mining Department of this state:

Money in the fund is available to rehabilitate abandoned mines across the State in circumstances where the tenement holder/operator fails to meet rehabilitation obligations and every other effort has been used to recover funds from the operator. Interest earned on fund contributions will be used to fund the administration of the MRF and will also be used to undertake rehabilitation works on legacy abandoned mine sites throughout the State. . . . The MRF account balance and levy percentage will be monitored on an ongoing basis to ensure that the fund is appropriately managed to meet current and emerging rehabilitation liabilities, as well as administrative costs.

13 www.mndm.gov.on.ca/en/mines-and-minerals/mining-sequence/development.

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General comments The guarantees system that seems very effective brings with it a very important challenge. The requirements of a guarantee must come with a strict regulation that establishes clear terms to measure and establish the costs of rehabilitation, and a sanctioning regime that promotes compliance with an adequate closure plan. The guarantee system, as set forth in most jurisdictions – by which only a percentage and not the full cost of the rehabilitation tasks is covered – may dissuade companies from performing a successful closure since, in the case of the rehabilitation cost exceeding the amount of the guarantee that would be lost if the closure was not performed, many companies may opt for abandoning the mine instead of responsibly and successfully closing it. In line with the above, the Western Australian system, which combines guarantees with the rehabilitation fund, seems to be an interesting solution to adopt in other jurisdictions. This system combines on the one hand, a guarantee that covers almost the totality of the rehabilitation costs, and on the other hand, a contribution to the fund that may be used either for abandoned projects or a closure process, or for the rehabilitation of future projects in case they cannot be rehabilitated by the operating company in the future. The great issue to solve is the additional challenge of the developing economies, which do not have the conditions for granting instruments to cover the legal minimums required, added to the lack of profitability for insurers, given the specialisation and the resources that the operation demands. Also, the countries should remember the need to monitor the progress of implementing this system and analyse the different offers of coverage presented in the market, a task that must be carried out directly by the states, and that would only be possible with solid institutions and a clear objective to ensure that successful closure costs will be covered.

Conclusion In the past, mining closure was not the top priority of companies, and countries did not have proper legislation and guidelines to address and enforce remediation activities, and technical and social issues of a mining closure. Legacy examples can be found and identified all over the world, and all of them affect the reputation of the industry. Once the resources were exhausted, projects shut down and limited remediation was performed, a negative legacy was left for the community and a burden for the tax payers. This situation was also common in other industries, but mining is quite often judged with different parameters. Since then, a lot of progress has been made. As described in this chapter, during the past 20 years, most mining developed countries issued rigorous mining closure legislation and guidelines. Not only the countries but also the companies themselves have paid specific attention to environmental issues and closure mitigation. The improvements of legal regimes include requesting different financial guarantees to assure remediation; addressing technical and social issues; the participation of affected communities; and addressing post-mining life. However, there is still a lot to be done. Mining can generate a lot of progress and sustainable development, especially in areas without alternatives and in developing countries. But closure legislation is not the same for all countries and, if the rigorous principles that apply in Canada, Australia or other developed countries are not applied in the rest

125 © Law Business Research 2019 Mining Closure of the world, the industry will still be affected. The lack of proper closure in developing countries (which could be holding the next reserve of minerals) may generate social instability, political unrest and even a plain prohibition to mining. Companies, financial institutions and mining organisations should work in coordination with developing countries not only to put in place the proper closure legislation and guidelines, but also, and no less importantly, to train local authorities on the analysis of the particular issues of each closure and in the enforcement of such rules. For example, the World Bank has been assisting countries in issuing changes to improve mining investments and promote environmental care. Why not replicate it in other sections of mining activity, by either financing technological innovations for proper rehabilitation practices or other kinds of developments? In addition, the life of communities after mining closure is still an issue. Most closure plans and legal regimes provide limited guidelines or solutions to deal with the social and economic impacts on communities near mining projects. Mining projects close not only owing to mineral exhaustion but also owing to the lack of economic feasibility (change in commodities prices) or as a result of administrative decisions that complicate any intended action. All closure plans should determine a term of three or five years prior to the estimated closure to work jointly with authorities and communities on future labour opportunities, and on the reutilisation of mining land for agriculture, tourism or any other activity that could imply an opportunity for the community. Some royalties generated by the project should contribute to special trust funds to support training for new jobs or new business opportunities. Finally, no closing can succeed if the environmental and social obligation did not start on the first day of operation. To ensure this, specific government agencies shall be appointed, an audit system must be regulated and enforced, mining plans should be public and communities must have the right to give their opinions. Figures on mining remediation costs and guarantees amounts should be public, and reviewed and updated periodically, jointly by the applicable government agency and the company. If the project is healthy, remediation closure issues should be easier to address.

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Argentina, Mining and Glacier Protection

Sergio D Arbeleche and Sebastián P Vedoya1

This chapter is about Argentina’s National Glacier Law, its impact on mining operations and subsequent developments.

Context Argentina is a federal country.2 Provinces (i) retain all powers not expressly delegated to the federal government in the National Constitution (the Constitution),3 (ii) are the original owners of the natural resources located within their respective territories, (iii) are in charge of applying the federal Mining Code and (iiii) can enact their own local environmental legislation, respecting the basic environmental standards set forth by the federal government, which in turn should never alter the powers retained by the provinces (eg, the power to conduct environmental evaluations of activities to be conducted in the provincial territories). Among the powers delegated by the provinces to the federal government, the following two (in connection with the subject matter) can be found: (i) enactment of the federal Mining Code,4 which is applicable in all Argentine territory, and (ii)

1 Sergio D Arbeleche and Sebastián P Vedoya are partners at Bruchou, Fernández Madero & Lombardi. 2 The Argentine provinces existed before the federal government. Provinces may also enact their own environmental legislation, which applies within their territories (known as local environmental legislation). The right of performing environmental evaluations and to deciding on environmental approvals on provincial territory belong to the provincial governments. 3 http://servicios.infoleg.gob.ar/infolegInternet/anexos/0-4999/804/norma.htm. 4 http://servicios.infoleg.gob.ar/infolegInternet/anexos/40000-44999/43797/texact.htm.

127 © Law Business Research 2019 Argentina, Mining and Glacier Protection enactment of minimum environmental standards legislation applicable nationwide to all activities, which all provinces must respect when enacting their own environmental local regulations.5 A series of minimum environmental standards regulations started to be approved by the National Congress (Congress) after the latest amendment to the Constitution in 1994. The first relevant environmental regulation of this kind was the inclusion in 1995 of an environmental chapter in the federal Mining Code, setting forth environmental obligations to be fulfilled by mining projects of all kinds.6 In 2002, Congress enacted the main minimum environmental standards legislation, Law No. 25,675,7 also known as the General Environmental Law, which is applicable nationwide to all activities, including mining.8 Among other important topics, this Law sets forth a series of provisions that are challenging for the mining industry to adopt, such as mandatory public consultation and mandatory environmental insurance for certain activities exceeding a specific environmental risk level. In the above-mentioned constitutional context, Congress approved in October 2010 a new minimum environmental standards regulation, specifically regulating the minimum environmental protection standards for the preservation of glacial and periglacial zones (the National Glacier Law, No. 26,639).9 Until the enactment of this Law, protection of glacial and periglacial zones was subject to the General Environmental Law.

Some history preceding the National Glacier Law The National Glacier Law was preceded by a strong political discussion mainly driven by environmentalists, anti-mining NGOs and some politicians, with a serious lack of technical, legal and factual analysis. As part of this political discussion, a previous bill regulating the minimum environmental protection standards for the preservation of glacial and periglacial zones was approved by Congress but vetoed by the President in 2008.

5 These minimum environmental protection parameters or standards may be imposed at the federal level as a base, and the provinces may lay down local environmental rules above those requirements or further regulate them without impairing or reducing the standard thereof. 6 Obligations imposed to mining activities by this new rule included the filing of an environmental impact report with the environmental competent authority for review and eventual approval, to be updated every two years, or earlier if required owing to significant changes to the project or unexpected relevant events demanding a review of the environmental assessment. Accordingly, mining activities had to fulfil and abide by the following environmental regulations: (i) those environmental regulations specifically applicable to mining (included in the federal Mining Code); (ii) local environmental regulations enacted by provinces (within their non-delegated powers) and (iii) federal environmental regulations, including the minimum environmental standards regulations. 7 http://servicios.infoleg.gob.ar/infolegInternet/anexos/75000-79999/79980/norma.htm. 8 The Federal Environmental Council defined through Regulation 92/2004 that a ‘minimum protection standard’ is an environmental protection base threshold to be passed by the federal government, and enforceable in a uniform manner in the entire federal territory as an irrevocable standard ensuring minimum environmental protection to all inhabitants, and that any construction of a minimum environmental standard must be made restrictively, aiming to achieve the purpose of environmental protection without altering or affecting the powers reserved to the provinces. 9 http://servicios.infoleg.gob.ar/infolegInternet/anexos/170000-174999/174117/norma.htm.

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The discussion on the need for a law protecting glaciers was triggered by a fictional scenario fostered by environmentalists and anti-mining NGOs supported by certain political sectors, arguing the following, among other things: • that without a glacier protection law, glaciers remain unprotected;10 • that the mining industry wanted to develop projects on and over covered and uncovered glaciers, which is irreconcilable with the protection thereof;11 • that without a prohibitory law on glacier protection, mining activity would be automatically permitted;12 and • glaciers are melting owing to mining.13

On 22 October 2008, Congress approved the first bill on minimum requirements for the protection of glaciers and the periglacial environment, as a law setting up minimum environmental requirements or standards applicable nationwide in connection with them.14 This bill was vetoed by the President (Veto Decree No. 1837/2008)15 on the following grounds: • the establishment of minimum standards may not be limited to an absolute prohibition of activities but, on the contrary, will lay down minimum standards to be followed by the provinces, although the provinces may establish stricter standards according to their special environmental condition; • even without a glacier protection law, before authorising any activity and the implementation of any investment it is necessary to ascertain, at a provincial level, the feasibility and technical and environmental viability of such investment. Thus, authorisation shall be granted only in respect of activities that imply or entail the possibility of being carried out within the framework of sustainable development with due care for the environment; • the prohibition of the activities described in the bill, if it comes into effect, may impair the economic development of the provinces involved, and hinder the performance of any kind of activity or work in the Andean areas.16 The prohibition against mining, or

10 However, since there are different protected areas in which mining is forbidden, such as national and provincial reserves of different nature. Of course, no mining activity is allowed or performed in these areas, and there is no discussion about it. Glaciers and other geological formations existing outside of specifically protected areas are part of the environment and are therefore subject to the protection of the general environmental legislation. 11 This is also untrue, since mining is not performed in such geological formations, many of which have specific legal protection beyond the National Glacier Law. 12 This is false, since the non-existence of a prohibition does not mean or imply that activities are automatically allowed since, for the activity to exist, the same must be previously assessed and approved from an environmental standpoint. 13 There is no scientific argument to sustain this as a general rule. Glaciers are melting owing to global warming, which is not attributable to mining. 14 This 2008 bill went through Congress without being analysed by the Mining Commissions of the House of Representatives or the Senate, or previously consulting with business chambers, industrial organisations or other representatives of activities that may be impacted by this new regulation. 15 http://servicios.infoleg.gob.ar/infolegInternet/anexos/145000-149999/146980/norma.htm. 16 The prohibition against construction of infrastructure works fails to take into account that many of them are public works intended for use by the community, such as cross-border roads.

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oil exploration and exploitation activities, including those carried out in the periglacial environment saturated with ice, will cause environmental aspects to prevail over activities that may be authorised and conducted with due care for the environment; • in view of the fact that the General Environmental Law provides for an environmental impact assessment system before authorising any work or activity capable of degrad- ing the environment, the prohibition contained in the bill proves excessive, and cannot validly form part of a minimum environmental standard; • the bill, upon subjecting any activity in progress to a new environmental audit – the outcome of which may derive in the relocation or discontinuance of the activity – fails to take into account that any activity currently in progress in the provinces involved has undergone and obtained the relevant environmental assessments and authorisations before being started, and is permanently monitored by the provincial environmental authorities; and • the activities prohibited under the bill and the undertaking of an environmental audit on activities in progress do not contemplate that the provinces involved, through their current institutions and national and local regulations, have in place enough control mechanisms to evaluate and authorise infrastructure, industrial, mining, hydrocarbon and other activities in full harmony and balance with due care for the environment.

Following an invitation made by the President in the Veto Decree, several Argentine provinces issued their own glacier protection laws:17 • Santa Cruz: Law No. 3,123 (2009);18 • San Juan: Law No. 8,144 (2010);19 • Salta: Law No. 7,625 (2010);20 • La Rioja: Law No. 8,733 (2010); and • Jujuy: Law 5647 (2010).21

Such provincial glacier laws did not establish prohibitions but more stringent evaluation processes. Two years after the 2008 bill was vetoed, the National Glacier Law was enacted and is currently in force. The National Glacier Law is almost identical to the 2008 bill.

17 A conflict between such laws and the National Glacier Law exists where the standard set forth by the provincial law is higher than the standard imposed by the National Glacier Law as a minimum environmental standard. As described when making reference to the reasons for the veto, this is a complex conflict, whereby on one hand the action of Congress is allowed by section 41 of the Constitution, and on the other hand the provinces have the right and are allowed to defend their respective jurisdictions as original owners of all powers not delegated to the federal government, as owners of the natural resources and as competent authorities to issue environmental permits, all of which are the limits of the exercise of powers granted by section 41 of the Constitution. 18 http://www.santacruz.gov.ar/ambiente/leyes_provinciales/ley%20N_3123%20de%20Glaciares.pdf. 19 https://farn.org.ar/wp-content/uploads/2015/10/Ley-8144-San-Juan.pdf.. 20 http://www.boletinoficialsalta.gob.ar/VersionImprimibleLeyes.php?nro_ley2=7625. 21 http://www.legislaturajujuy.gov.ar/img/sesiones/ftp/s_701/66-P-10_LEY%205647_10.pdf.

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Accordingly, all criticisms made in the Veto Decree (which evidenced the unconstitu- tionality of the 2008 bill) are completely applicable to the National Glacier Law.

The current regime The National Glacier Law In September 2010, the National Glacier Law was approved by Congress, and was factu- ally enacted and published in the Official Gazette in October 2010. The main features of the National Glacier Law are the following: • Minimum standards for the protection of glaciers and periglacial environments are established, with the aim of preserving them as strategic reserves of water resources for human consumption; for agriculture and as water suppliers for the hydrographic basins recharge; for biodiversity protection; as a source of scientific information; and as a tourist attraction. Glaciers are public goods. • ‘Glacier’ is defined as any mass of perennial ice resting on land or flowing slowly, with or without interstitial water, formed by the recrystallisation of snow, located in different ecosystems, regardless of its form, dimension and conservation state. Rock debris and internal and superficial water courses are a constituent part of each glacier. Likewise, the ‘periglacial environment’ in the high mountains is the area with frozen soils acting as a regulator of the water resource, and the ‘periglacial environment’ in the mid and low mountains is the area acting as the regulator of water resources with soils saturated with ice. • A National Inventory of Glaciers was created (the Inventory), where all glaciers and periglacial geological formations (geoforms) acting as water resources existing in the national territory shall be individualised, with all the necessary information for their adequate protection, control and monitoring. Responsibility for the Inventory was allocated to the Argentine Institute of Nivology, Glaciology and Environmental Sciences (IANIGLA) with the coordination of the national law enforcement authority. • The following activities are prohibited on the glaciers: activities that may affect their natural conditions or the functions pointed out above, and activities involving their destruction or transport, or interfering with their progress. Particularly, the following activities are prohibited (the Prohibited Activities):22 • the release, dispersion or disposition of polluting substances or elements, chemical products or waste of any nature or volume. Said restrictions are also applicable to those activities carried out in the periglacial environment; • the construction of architectural or infrastructure works, except for those necessary for scientific investigations and risk prevention; • mining and hydrocarbon exploration and exploitation. Said restrictions are also applicable to those activities carried out in the periglacial environment; and • the installation of industries, or the development of industrial works or activities.

22 Where the prohibition would apply, glaciers and protected geoforms with relevant water functions are in principle identifiable. The main problem is that the vague language of the National Glacier Law, and the anti-mining NGOs’ aim against mining activity, tried to force the concept that the prohibition was applicable in all periglacial environments (a much broader concept than just the glacial geoforms with relevant water functions).

• IANIGLA was instructed to perform the Inventory immediately in those areas that are considered a priority owing to the existence of Prohibited Activities. All competent authorities were instructed to provide the relevant information required by IANIGLA for such purposes. • All activities projected on glaciers and periglacial environments that are not prohibited are subject to an environmental impact assessment and strategic environmental assessment process.23 • Activities subject to prohibition that were already in existence at the time of the enactment of the National Glacier Law must undergo, irrespective of the already obtained environmental permit, a new environmental audit (environmental re-evaluation) to determine impacts on glaciers and periglacial environments. In the event that a significant impact on glaciers or periglacial environments is verified, the authorities are instructed to establish the relevant measures in order to comply with the Glaciers Protection Law, having the power to order the termination or relocation, or both, of activities, as well as all necessary clean-up, protection and restoration measures.24

In summary, the system of the National Glacier Law for activities subject to prohibition is as follows: • new activities (those initiated after the National Glacier Law enactment) are subject to the prohibition and exclusion of the possibility of an environmental impact evaluation by provincial authorities; and • ongoing activities (those that would fall under the National Glacier Law prohibition but were already in existence at the time of the National Glacier Law enactment) had to be subject to a new environmental re-evaluation irrespective of the environmental permit already obtained. Under the precautionary principle established by the General Environmental Law, NGO’s argued that such ongoing activities should be suspended until an environmental re-evaluation was successfully carried out.

In addition to the prohibition included under National Glacier Law being an excessive protectionist measure and the exclusion of certain activities to access the environmental

23 This means that in addition to the prohibition of certain activities, the activities prohibited are excluded from the environmental impact evaluation. The minimum environmental standards legislation does not only contain a mandate for provinces not to environmentally approve certain activities when impacts are verified, but rather exclude such activities from the possibility of filing an environmental impact report. This last feature generated an intense discussion between anti-miners and the mining industry. Anti-miners argued that all prohibited activities (even mining activities in periglacial environments) are excluded from the possibility of an environmental impact assessment. 24 Based on this feature, anti-mining NGOs intended to suspend all undergoing projects until they obtained a favourable environmental re-evaluation. However, the mining sector argued that the existing projects have already had an environmental assessment (which is and was a mandatory requirement under pre-existing environmental legislation) and that the impacts on the environment, including glaciers, were already evaluated, and therefore the precautionary principle of suspending the activities under execution does not apply. Although this discussion reached the courts, so far no mining project has been suspended. Special environmental audits have been performed on some existing mining projects, resulting in the demonstration of the non-existence of impacts to geoforms protected under glaciers protection law.

132 © Law Business Research 2019 Argentina, Mining and Glacier Protection impact evaluation process (affecting the provincial non-delegated power to conduct environmental impact evaluations in their own territories), one of the issues strongly criticised was related to the geographic extension of the prohibition (only glacial geoforms with relevant water functions or all periglacial environments – which is a much broader concept). The arguments of anti-miners extend the scope of the prohibition (by using the periglacial environmental concept) to practically all the Argentine Andes; the mining industry focused on the interpretation that the protection should apply to glacial geoforms with water functions (ie, geoforms within the glacial and periglacial environments as inventoried by IANIGLA, but not all periglacial environments).25 In the context of such discussion, IANIGLA completed the Inventory, which was performed based on international scientific criteria, and reviewed and approved by IANIGLA and the federal environmental authority. IANIGLA adopted the criteria where only geoforms with relevant water functions should be included in the Inventory as protected geoforms and not all periglacial environments, which do not necessarily have relevant water functions. Following international criteria, for IANIGLA, only the uncovered, covered and rock glaciers with a life exceeding two consecutive years and extending at least 1 hectare, could potentially have relevant water functions. For the purposes of implementing the National Glacier Law, and mainly for the elaboration of the Inventory, additional regulations were approved. National Executive Order No. 207/1126 stated that, among other purposes, the Inventory was ‘to define the kind and level of detail necessary so that the glaciological and geocryological information obtained can enable the correct management of the strategic reserves of water resources’.27 Following such regulation, IANIGLA and the National Scientific and Technical Research Council (CONICET) prepared a document called ‘National Inventory of Glaciers and Periglacial Environment: Reasons and Implementation Schedule’28 (the Inventory’s Reasons and Implementation Schedule), which contains the objectives, background, monitoring strategy, methods, estimated costs and completion time of the Inventory. This document stated as follows:29 • The Inventory’s main objective is the identification, characterisation and monitoring of all glaciers and cryoforms acting as strategic water reserves in the national territory.

25 Some provinces and companies have filed with the National Supreme Court claims against the National Glacier Law under the argument that such Law is unconstitutional. A final decision on such claims is pending. 26 http://servicios.infoleg.gob.ar/infolegInternet/anexos/175000-179999/179680/norma.htm. 27 Regarding said Executive Order it was put on record that the National Glacier Law ‘understands that a strategic natural resource is every scarce resource currently or potentially vital for the human activity development or for the maintenance of a Nation’s quality of life’. And that, in particular, solid-state water reserves ‘are considered a “strategic reserve” due to their long-term capacity for regulation’. 28 http://www.glaciaresargentinos.gob.ar/wp-content/uploads/legales/fundamentos_cronograma_ ejecucion.pdf. 29 Also, the Inventory’s Reasons and Implementation Schedule includes an explanation about the satellite images system used for the Inventory, with which the majority of similar inventories in Europe and around the world have been made.

• For the specific and operative purposes of the Inventory, IANIGLA proposed specific definitions and a minimum size of the bodies to be inventoried inside Argentina’s glacial and periglacial environments. • When defining the term ‘glacier’, the document states that it is a permanent ice body originated on land, visible for at least a period of two years, with (or without) evidence of movement owing to gravity (cracks, ogives, medial moraines), and of a surface greater than or equal to 0.01km2 (1 hectare – a minimum surface that is also applicable to ‘rock glaciers’). • A strategic water reserve is a strategic natural resource, which is a very scarce resource currently and potentially vital for the development of human activity and for the maintenance of a nation’s quality of life. When referring to water resources, in particular to solid-state water reserves, a ‘strategic reserve’ refers to the long-term capacity for regulation – that is to say, the water accumulation in prosperous years and its release in years of shortage. • ‘Perennial ice’ is water in solid state, formed by snow compaction. To be able to consider it perennial, the ice must stay in the same place for two or more years.

In 2014, IANIGLA prepared the ‘Handbook for the Preparation of the National Inventory of Glaciers’ (the Handbook). According to the Handbook, it had the aim of providing a ‘detailed methodological guide for those technicians and professionals in charge of the preparation of the National Inventory of Glaciers’. As the Handbook reveals, the geological formations that could have a water function in glacial and periglacial environments are uncovered glaciers,30 snow patches or glacierets,31 covered glaciers32 and rock glaciers.33 When detailing each of the inventoried geological formations, the Handbook adopted the minimum size of 0.01km2 (1 hectare), as it was proposed in the Inventory’s Reasons and Implementation Schedule.34

30 Uncovered glacier: a permanent ice body originated on land by the compaction and recrystallisation of snow, ice, or both, without significant rock debris, visible for at least a period of two years with evidence of movement owing to gravity (cracks, ogives, medial moraines) and of a surface greater than or equal to 0.01km2 (1 hectare). 31 Snow patches or glacierets: permanent ice or snow bodies originated on land by the compaction and recrystallisation of snow, ice, or both, without significant rock debris, visible for at least a period of two years, but which do not show evidence of movement owing to gravity. Permanent snow patches or glacierets are solid-state water reserves and have therefore been included in the inventory. 32 Covered glacier: a permanent ice body originated on land by the compaction and recrystallisation of snow, ice, or both, with significant rock debris, visible for at least a period of two years with evidence of movement owing to gravity (cracks, ogives, medial moraines) and of a surface greater than or equal to 0.01km2 (1 hectare). 33 Rock Glacier: a mass of frozen rock fragments and ice, with evidence of movement by the influence of gravity and deformation of the mountain permafrost, the origin of which is related to the cryogenic processes associated with permanently frozen soils and underground ice, or with the ice coming from covered and uncovered glaciers, and of a surface greater than or equal to 0.01km2 (1 hectare). Rock glaciers depend greatly on the existence of rock debris, snow and ice. 34 Likewise, as regards uncovered ice, the Handbook expressly highlights that ‘the minimum area to be inventoried for covered and uncovered ice and rock glaciers is a surface greater than or equal to 0.01km2 (1 hectare).’

The aforementioned criteria were approved by the national environmental authority through Executive Order No. 1141/2015,35 which approved the ‘Administrative Procedure for document and data management of the National Inventory of Glaciers’ for document and data management of the Inventory. This Executive Order established that IANIGLA shall make the Inventory and a ‘single procedure for the technical validation of the National Inventory of Glaciers’ pursuant to the methodology established in the Inventory’s Reasons and Implementation Schedule, which stated that the national enforcement authority does not validate IANIGLA’s inventories as regards their specific technical content, since it has not been formally conferred said power. The validation is the verification of compliance with the above-mentioned documents, which have the criteria approved by the enforcement authority. This Executive Order further refers to IANIGLA’s Handbook stating that the minimum area of uncovered ice to be inventoried is 0.01km2, and that it is necessary to verify that each inventory clarifies the criterion adopted regarding this matter. This Executive Order constituted the approval of IANIGLA’s criteria by the national environmental authority, and imposed on IANIGLA the responsibility of respecting said criteria. A full copy of additional regulations related to the National Glacier Law36 and the Inventory37 are available online on the official web page: www.glaciaresargentinos.gob.ar. As explained, IANIGLA adopted the criteria of 0.01km2 as a minimum size for including ice bodies in the Inventory. Pursuant to Executive Order No. 1141/2015, the adopted criterion coincides with the general guidelines of the World Glacier Monitoring Service (WGMS)38 and the International Permafrost Association (IPA).39 The criteria used by IANIGLA for the elaboration of the Inventory is consistent with the criteria used internationally for similar works, and has solid scientific grounds.40 The ‘Recommendations for the compilation of glacier inventory data from digital sources’ (the Recommendations)41 – prepared by different authors who are members of the WGMS and the National Snow and Ice Data Center (NSIDC),42 published by the International Glaciological Society in the Annals of Glaciology in 200943 – offer an expla-

35 http://servicios.infoleg.gob.ar/infolegInternet/anexos/255000-259999/258825/norma.htm. 36 After the issuance of Executive Order No. 1141/2515, numerous additional regulations were issued by the national environmental authority, by which IANIGLA’s inventory of each basin and sub-basin existing in the country was published, the inventory’s disclosure was authorised and expressly recognised in their whereas clauses that the procedures established for the inventory’s preparation had been complied with, pursuant to Regulation No. 1141/2015. These regulations can be found on http://www.glaciaresargentinos.gob.ar/?page_id=521. 37 http://www.glaciaresargentinos.gob.ar/?page_id=193. 38 https://wgms.ch/. 39 https://ipa.arcticportal.org/. 40 Also, the Handbook states that the document ‘is based on . . . guidelines and methodologies previously used by IANIGLA and international groups specialized in glacier inventories (World Glacier Monitoring Service, WGMS, and the project Global Land Ice Measurements from Space, GLIMS)’. 41 https://www.glims.org/glacierdata/data/lit_ref_files/paul2009.pdf. 42 https://nsidc.org/. 43 https://www.cambridge.org/core/journals/annals-of-glaciology/article/recommendations- ‑for-the-compilation-of-glacier-inventory-data-from-digital-sources/6BAE48BE4 B8FEEEEBCFB59A2684A2427.

135 © Law Business Research 2019 Argentina, Mining and Glacier Protection nation as to why the WGMS decided to adopt the criterion of 1 hectare as a minimum to inventory glaciers.44 In other cases, inventories have been made using similar or even less strict criteria: • Alaska: 0.025km2 (or 2.5 hectares) and 0.02km2 (or 2 hectares); • Canada: 0.05km2 (or 5 hectares); • Norte Chico, Chile: 0.01km2 (or 1 hectare); • France: 0.01km2 (or 1 hectare); • Norway: 0.01km2 (or 1 hectare); • Peru: 0.01km2 (or 1 hectare); and • Switzerland: 0.1km2 (or 10 hectares).

Based on the above, it is reasonable to argue that the 0.01km2 criteria used by IANIGLA is within the international scientific standard, and it even has a similar or greater degree of detail than some of the inventories prepared in countries with a long tradition in glacier studies, and that have already completed several national inventories, such as Switzerland and Canada. As it can be observed, among the international requirements commonly used, IANIGLA adopted the most inclusive and demanding.45

The current situation It is very clear that the National Glacier Law was aimed, by some groups that fostered it, to prohibit mining rather than protect geological formations with a water function. After the issuance of the National Glacier Law, environmentalists and anti-mining NGOs made efforts to suspend the operation of existing mining projects, and prevent the development of new projects. Several mining companies challenged the constitutionality of the National Glacier Law. Many of these challenges are currently waiting to be decided by the National Supreme Court.

44 The minimum size of glaciers was not defined consistently in relation to the existing inventories. For example, the inventory of glaciers in Svalbard only registered ice bodies exceeding 1km2 (WGMS 1989). In the Alps, with a different distribution of dimensions, 90 per cent of the glaciers would have been excluded according to this rule. However, a size of 0.01km2 could be seen as a practical minimum limit since there can be a great number of geological formations inferior to it and their status as glaciers is doubtful. This is also the minimum size that can be identified with certainty in good conditions from the satellite sensor operating between 15 and 30 metres of spatial resolution (eg, Terra ASTER, SPOT HRV, Landsat TM/ETM+). This is why the use of 0.01km2 is recommended as the minimum size to be registered when permitted by the conditions. This small size is also important to follow temporary developments. The geological formations that were much bigger in a previous inventory could have decreased to this size, or several snow patches of this size. In this case, the total size of the remaining ice bodies could again be superior to 0.01km2. 45 If the minimum size was inferior to 1 hectare there would be a lack of water function (a size of 0.01km2 could be seen as a practical minimum limit since there can be a great number of geological formations inferior to it and their condition as glaciers is doubtful). It is the minimum unit allowing for the localisation of geological formations through satellite technology internationally accepted for the preparation of a glacier inventory. This is why the use of 0.01km2 is recommended as the minimum size to be registered when permitted by the conditions.

Also, under the initiative of anti-mining NGOs (which aimed to prohibit mining in all of the periglacial environment), criminal action was started against former officers of the national government who were in charge of performing the Inventory, (including the former head of IANIGLA, Dr Ricardo Villalba),46 under the accusation of a lack of fulfilment of their duties, alleging that by further regulating the National Glacier Law, together with the Inventory (which adopted the 0.01km2 criteria defined by IANIGLA) the National Glacier Law protection scope was reduced.47 Dr Villalba is currently under indictment for this accusation. The scientific community has been very clear in rejecting the indictment, which had international repercussions. According to an interview (published online)48 with Mr Bruce Raup, a glaciologist at the NSIDC in Boulder, Colorado, the persecution of IANIGLA’s scientists ‘is surreal and kind of ridiculous’, since many scientists set a minimum glacier size of 1 hectare to reduce the risk of incorrectly counting ephemeral snow and ice. More than 130 scientists of different institutions worldwide published a ‘Letter of Support for Dr Ricardo Villalba in his capacity as former Director of the Argentine Institute of Snow and Glaciers (IANIGLA) and of the National Glacier Inventory of Argentina’.49 In such letter, the signatories explained as follows:

the methodology of mapping glaciers implemented in the National Glacier Inventory unquestionably met the international norms and standards for glacier mapping. The methodology applied in the National Glacier Inventory was approved by: 1) the Presidency of CONICET, 2) the Ministry of Science, Technology, and Productive Innovation, 3) the Secretariat of the Environment and Sustainable Environment, and 4) the Cabinet Chief of Ministers of the Nation of Argentina. The National Glacier Inventory and the methodologies used to derive it follow the best practices and the recommendations from the international glaciological community. These methodologies are in line with the recommendations made by Global Land Ice Measurement from Space (GLIMS) . . . Specifically, the application of a minimum area threshold for inclusion of glaciers is a mandatory

46 According to the scientific community (see ‘Letter of Support for Dr Ricardo Villalba in his capacity as former Director of the Argentine Institute of Snow and Glaciers (IANIGLA) and of the National Glacier Inventory of Argentina’), ‘Dr Villalba is among the top climate scientists in Argentina. He is a Senior Research Scientist of CONICET (National Research Council of Argentina) at the Argentine Institute of Snow and Glaciers (IANIGLA) in Mendoza. He holds the following academic degrees: BS in Forest Engineering (Universidad Nacional de La Plata, Argentina); MS in Photo Interpretation in Forestry (CIAF, Colombia); and PhD in Geography (University of Colorado, USA). Dr Villalba was also a Postdoctoral Research Fellow at Lamont-Doherty Earth Observatory (Columbia University, USA). This breadth of academic training is impressive by any standard.’ 47 Although the publication of the Inventory brought some clarity regarding the scope of the protection established by the National Glacier Law, there is still an important uncertainty for the development of projects (mining and other infrastructure projects located in glacial and periglacial environments), as a consequence of the criminal actions started by environmentalist and anti-mining NGOs against the officers responsible of the regulation the National Glacier Law and of performing the Inventory (but without formally challenging the regulations or the content of the Inventory), some of whom are currently indicted as a consequence of questionable decisions of the federal courts, mainly driven by political reasons and without making any serious scientific analysis of the subject matter. 48 https://www.nature.com/articles/d41586-017-08236-y. 49 http://www.conicet.gov.ar/wp-content/uploads/Letter_Villalba.pdf.

scientific practice. The 0.01km2 (1 hectare) minimum value used in the National Glacier Inventory is smaller (ie, a higher standard) than the one used in many others scientific studies of glaciers.

Despite the efforts made by the scientific community, the mining industry and some public officers at the national and provincial level, federal courts have been reluctant to make a reasonable, scientific, professional and grounded analysis of the National Glacier Law and of the Inventory, and of the real scope of protection established by the National Glacier Law. Political interests continue to distort the discussion, with the outcome of persons being unjustifiably indicted and legal uncertainty being maintained, preventing mining and infrastructure projects from being developed under a uniform criteria and understanding of the National Glacier Law’s protection scope. The discussion around the right National Glacier Law interpretation and scope is not over. The unsustainability of the aforementioned situation, the lack of logic and reason- ability of the position of environmentalists and anti-mining NGOs, and the need for economic and social development in areas with predominant dependency on mining activity – mainly located near the Andes and in areas with high levels of poverty – led some public national and provincial authorities, the mining industry and part of the scientific community to push for a reasonable interpretation of the National Glacier Law and a more definitive and clear solution. The federal government is analysing the pos- sibilities and available tools to legally clarify that mining activity can be carried out in a sustainable way in glacial and periglacial environments, provided that geoforms subject to protection under the National Glacier Law (under a reasonable and scientific interpretation of the scope of protection (ie, glacial geoforms with relevant water functions)) are not affected, and that all permits, including those of an environmental nature, are duly obtained.50 Solid arguments have been raised to support this position, including: • the literal language of the National Glacier Law; • the reasonable interpretation of the National Glacier Law (avoiding an absurd interpretation that would lead to believing that the National Glacier Law wanted to protect the periglacial environment without protecting the glacial environment); • Congress debates about the National Glacier Law; • IANIGLA’s criteria for preparing the Inventory, matching international criteria; and • regulatory Executive Order No. 1141/2015 of the National Glacier Law.

We briefly explain these arguments below.

50 In this regard, it is important to understand that glacial and periglacial environments are not protected as a whole per se under the National Glacier Law (they are protected by environmental laws in general), since it only provides specific and enhanced protection to the geological formations or cryoforms if they have water functions. Therefore, the legally protected interests in the National Glacier Law are specifically the geological formations with water functions existing in glacial or periglacial environments: the covered and uncovered glaciers (both kinds inside the glacial environment) and rock glaciers (in the periglacial environment), with the scope defined by the regulations and IANIGLA.

The literal language of the National Glacier Law In the language of the National Glacier Law it is clear that the geological formations in glacial environments, and geological formations in periglacial environments with water functions, are the Inventory’s purpose and the interest protected by the National Glacier Law and, thus, it is referring to the covered and uncovered glaciers in the glacial environment, and rock glaciers with water functions in the periglacial environment. The geological formations of less than 1 hectare were not included because they do not have water functions. If the periglacial environment had been the interest protected by the National Glacier Law, IANIGLA would have been ordered to map the environment without the need of an inventory of protected geological formations.51

Reasonable interpretation of the National Glacier Law Avoiding an absurd conclusion The National Glacier Law simply refers to glaciers and periglacial environments but never to the glacial environment. It would be absurd to claim or interpret that the National Glacier Law only protects (i) the geological formations with water functions in the glacial environment and (ii) the periglacial environment itself. It is as absurd as claiming that the National Glacier Law only wanted to protect the geological formations with water functions in the glacial environment on one hand, and the whole periglacial environment on the other hand, leaving the glacial environment without protection. If the National Glacier Law had wanted to protect the periglacial environment itself, and dissociated from the water functions referred to in the National Glacier Law, it would have included the glacial environment itself as a protected interest, but it did not.

Congress debates During Congress debates preceding the issuance of the National Glacier Law, in a speech before the Committee on Environment and Sustainable Development of the Senate, the following was said as regards Dr Ricardo Villalba:

In what we consider the most sincere expression of the real problem existing as regards this law, Mr Villalba explains that he is deeply hurt by the fact the Glacier Law is used to prevent mining activities, because glaciers play an essential role and they must be protected as a water resource. It is sad that the political spirit of preserving glaciers is changed to the mining activities.

In such context, Dr Villalba argued before the aforementioned Committee that the concept of the periglacial environment should be limited only to those geological formations

51 Also, an adequate interpretation of the National Glacier Law provisions regarding Prohibited Activities is that those mining activities that are not under execution at the moment the National Glacier Law is enacted (that is to say, the new ones since its enactment) shall be prohibited only when they affect glaciers in the glacial environment, or affect glaciers with water functions in the periglacial environment.

139 © Law Business Research 2019 Argentina, Mining and Glacier Protection that ‘serve as strategic reserves of water resources’, and that ‘inside periglacial environment, as regards the rock glacier that is precisely where the water reserve is located . . . we are not going to protect a soil that is frozen and thawed periodically and which does not even have a morphology pertaining to a periglacial environment, because it has no importance and it is not a regulator’. Moreover, Dr Villalba added that ‘if we have to regulate it . . . we will end up protecting those strategic reserves of water resources . . . and inside periglacial environmental, the rock glacier, which is precisely the environment rich in water where the water reserve is located’.

IANIGLA’s criteria for preparing the Inventory, matching international criteria IANIGLA’s criteria for preparing the Inventory, aligned with international criteria in the subject matter, was as follows: • all glaciers and periglacial geological formations acting as water resources existing in the country shall be individualised in the Inventory, with all the necessary information for their adequate protection, control and monitoring; • the Inventory’s main objective is the identification of all glaciers and cryoforms (of periglacial environments) acting as strategic water reserves, as well as to determine the hydrologic importance of these ice bodies; • glaciers and cryoforms acting as water reserves along the Andes have different characteristics, dimensions and forms; • inside the periglacial environment there are different geological formations, but owing to their ice content, size and morphology, the most important and significant ones are rock glaciers; • for the specific and operative purposes of the Inventory, specific definitions and a minimum size of the bodies to be inventoried inside Argentina’s glacial and periglacial environment are required; • strategic solid-state water reserves can be grouped into two large groups: glaciers (covered and uncovered) and rock glaciers;52 • IANIGLA’s definitions coincide with the general guidelines of the WGMS and the IPA; • in the periglacial environment, there are various geological formations with ice inside. However, rock glaciers are the most important ones as a water reserve because they are supersaturated with ice; • when speaking of solid-state water reserves, ‘strategic reserve’ refers to the long-term capacity for regulation; and • apart from rock glaciers, there are different geological formations associated with the periglacial processes and conditions. When these kinds of geological formations reach a size greater than 0.01km2 and show a downslope movement, they can be considered rock glaciers and, thus, they are included in the Inventory.

52 These large groups contain, in terms of both volume and surface area, the largest solid-state water reserves to be found in the mountains. Moreover, owing to their physical characteristics, they can be easily identified and defined.

The above clearly shows that broad scientific work and analysis was made by IANIGLA to define the scope and methodology of the Inventory, in full compliance of the National Glacier Law, all of which was performed following international criteria and standards.

Executive Order No. 1141/2015 As the most clarifying aspect of the National Glacier Law legal framework, the criterion established by Executive Order No. 1141/2015 to implement the Inventory consisted of the identification, mapping and characterisation of glaciers and periglacial geological formations acting as water reserves in the national territory. Therefore, it is clear that the ice bodies to be included in the inventory are only glaciers and those periglacial geological formations acting as water reserves. This is absolutely important since, in light of the Congress debates, when the periglacial geological formations are linked with the water reserve function, the definition and scope of the protected periglacial geological formations becomes clear, since only these are the ones that have the function of acting as water reserves. None of the regulations supplementing the National Glacier Law have been formally challenged by environmentalists and anti-mining NGOs, or by the courts persecuting Dr Villalba and other former officers of the national administration for their work related to the Inventory.

Conclusion Solving the confusion and problems resulting from the distortion of the purpose, meaning and protective scope of the National Glacier Law is a pending issue for the national government, which has identified mining development as one of the pillars of the future of the country’s growth. Mining provinces with territory in the Andes and the mining industry are in need of clarity and legal certainty. The activity of anti-mining NGOs, and part of the judiciary supporting their political agenda, is a real source of concern for those making decisions on mining investments and mining environmental permits. Different solutions are being explored, which rank from an interpretation decision taken by the National Supreme Court to the enactment of a supplementary law or regulatory executive orders. Implementation of a good solution is still uncertain and will depend on the evolution of the political environment in light of the presidential elections in 2019.

The Legal Nature of Mining Rights in Ecuador

César Zumárraga and Juan Fernando Larrea Savinovich1

This chapter will cover the following: • property of non-renewable natural resources, including multiple conceptions and different approaches; • constitutional provisions regarding non-renewable natural resources; • regulations and granting of mining rights; • challenges of the mining industry in Ecuador; and • exploration activity by foreign entities in Ecuador.

Property of non-renewable natural resources In order to analyse the legal nature of mining rights in Ecuador, it is necessary to define the property of such resources under the Ecuadorian legal framework. The Ecuadorian legal system is based on civil law and, in accordance with the Constitution, the state owns all minerals and non-renewable natural resources within national territory. In this regard, article 408 of the Constitution states the following:

Non-renewable natural resources and, in general, products coming from the ground, mineral and petroleum deposits, substances whose nature differs from that of the land, including those that are located in areas covered by territorial sea waters and maritime zones, as well as biodiversity and its genetic heritage and the radio-electric spectrum, are the unalienable property of the State, and are not subject to a statute of limitations or seizure. These assets can only be produced in strict compliance with the environmental principles set forth in the Constitution.

1 César Zumárraga is a senior partner and Juan Fernando Larrea Savinovich is a senior associate at Tobar ZVS Spingarn.

In light of the above, non-renewable natural resources are categorised by the Constitution as ‘strategic sectors’. To understand the scope of strategic sectors, article 313 of the Constitution defines them as follows:

Strategic sectors, which come under the decision making and exclusive control of the State, are those that, due to their importance and magnitude, have a decisive economic, social, political or environmental impact and must be geared toward ensuring the full exercise of rights and the general welfare of society. The following are considered strategic sectors: energy in all its forms, telecommunications, non-renewable natural resources, oil and gas transport and refining, biodiversity and genetic heritage, the radio-electric spectrum, water and others, as established by law.

Strategic sectors are managed, regulated, controlled and governed exclusively by the state. Nevertheless, the state can, on an exceptional basis, in accordance with article 316 of the Constitution and article 30 of the Mining Law, delegate the development of such sectors to individuals or entities. In the case of the mining industry, the state grants mining concessions for a term of 25 years.

The State may, on an exceptional basis, delegate the exercise of these activities to private enterprise and the social and solidarity sector of the economy, in the cases set out by law.2

Mining concessions. The State may exceptionally delegate its participation in the mining sector by way of concessions.3

Regarding article 316 of the Constitution, the highest court of interpretation of constitutional provisions in Ecuador, the Constitutional Court, handed down a ruling in sentence No. 001-12-SIC-CC, dated 5 January 2015, confirming that the state can, on an exceptional basis, delegate the development of strategic sectors to individuals or entities. In this particular scenario, according to article 30 of the Mining Law, the concessionaire will have the exclusive right to explore, exploit, process and sell any metallic minerals within the concession. Another important element to consider within the scope of non-renewable natural resources property in Ecuador is that mining is considered to be of public interest, according to article 15 of the Mining Law. This means that mining has a special category and more protection than other private interests, including land ownership. For instance, if a concessionaire suffers any form of disruption as a result of actions by a third party, they have the right to file an administrative relief action with the Mining Regulation and Control Agency (ARCOM), which can take either direct or indirect preventive measures.

Public utility. Mining operations, in all phases, inside and outside of mining concessions, are of public utility. Thus, any easement deemed necessary may be created, within the framework and limits established herein, taking into account the prohibitions and exceptions set out in Article 407 of the Constitution of the Republic of Ecuador.4

2 Article 316, Constitution of the Republic of Ecuador. 3 Article 30, Ecuadorian Mining Law. 4 Article 15, Ecuadorian Mining Law.

A third and final element to be considered for this analysis, which is related to property, is the difference between mining rights and surface rights. Unlike other jurisdictions, in Ecuador, ownership of mining concessions is different to the ownership of surface land. Overall, private parties may acquire any form of surface rights, from ownership of the surface area to leases, usufructs and easements, etc. Moreover, if a mining concessionaire wishes to acquire an easement over a surface area in order to develop its mining operations, it can either enter into an agreement with the owner of the surface area, or request that the ARCOM impose an easement. In the latter case, holders of these surface rights cannot oppose such requests since, as said above, mining rights are considered of public interest. Regarding ownership of land surface rights, foreigners (individuals or corporations) cannot acquire any surface rights within border zones that concern an area within 20 kilometres of national borders. To summarise, regarding non-renewable natural resources property in Ecuador, the following must be taken into consideration: mining is considered to be of public interest, the state owns all minerals and non-renewable natural resources within national territory, and mining rights and surface rights are different.

Constitutional and legal provisions regarding non-renewable natural resources Having addressed the ownership of non-renewable natural resources in Ecuador – particularly the right of the state to said resources, the concept of public utility, and the difference between mining rights and property rights – we will reference the main constitutional and legal provisions regarding non-renewable natural resources, and contextualise the above concepts within the local legislation. Overall, the regulations regarding non-renewable natural resources, particularly those related to the mining industry, are contained in the following regulatory bodies: • the Constitution; • the Mining Law; • the General Mining Regulation; • the Small-Scale and Artisanal Mining Regulations; • the Environmental Act; • the Environmental Regulations for Mining Activities; • the Organic Law of Hydrological Resources, Uses, and Exploitation of Water; and • the Hydric Resources Regulations.

The main constitutional provision regarding ownership of non-renewable natural resources within the Constitution is article 408, which states the following:

Non-renewable natural resources and, in general, products coming from the ground, mineral and petroleum deposits, substances whose nature differs from that of the land, including those that are located in areas covered by territorial sea waters and maritime zones, as well as biodiversity and its genetic assets and the radio-electric spectrum, are the unalienable property of the State, and are not subject to a statute of limitations or seizure. These assets can only be produced in strict compliance with the environmental principles set forth in the Constitution.

The state shall receive profits stemming from the exploitation of these resources, in an amount that is no less than the profits earned by the company producing them. The State shall guarantee that the mechanisms for producing, consuming and using natural resources and energy conserve and restore the cycles of nature, and foster living conditions marked by dignity.

Apart from the undisputed ownership of non-renewable natural resources, article 408 emphasises the obligation to develop such resources in strict compliance with the environmental principles enshrined in the Constitution. Thus, the Constitution includes non-renewable natural resources as part of the strategic sectors. As briefly explained, the state reserves the right to administer, regulate, monitor and manage strategic sectors.

The State reserves the right to administrate, govern, monitor and manage strategic sectors, following the principles of environmental sustainability, precaution, prevention and efficiency. Strategic sectors, which come under the decision making and exclusive control of the State, are those that, due to their importance and magnitude, have a decisive economic, social, political or environmental impact and must be geared toward ensuring the full exercise of rights and the general welfare of society. The following are considered strategic sectors: energy in all its forms, telecommunications, non-renewable natural resources, oil and gas transport and refining, biodiversity and genetic heritage, the radio-electric spectrum, water and others, as established by law.5

The role of the state is clear regarding strategic sectors, and particularly non-renewable natural resources, owing to their importance and magnitude. Undoubtedly, developing non-renewable natural resources has a decisive economic, social, political and environmental impact on the national economy. However, developing non-renewable natural resources in such a mega-diverse country as Ecuador is not an easy task. Therefore, one of the innovations of the Constitution is the incorporation of the rights of nature. To this end, article 317 of the Constitution expands of this concept:

Non-renewable natural resources are part of the inalienable heritage of the State and are not subject to a statute of limitations. As part of managing these resources, the State shall prioritize the responsibility between generations, conservation of nature, collection of royalties or other non-tributary contributions and corporate shares; and shall minimize the negative impacts of an environmental, cultural, social and economic nature.

Overall, the constitutional concept of non-renewable natural resources and their development are well described in the Constitution. Its principles are well developed and its inter- relation with other fundamental rights, such as the rights of nature, are correctly detailed. Nevertheless, considering the topic of this chapter, one of the main issues regarding the legal nature of mining rights in Ecuador – not on a constitutional level but on a legal level – is contained in the Mining Law, and is the concept of mining rights as personal rights.

5 Article 313, Constitution of the Republic of Ecuador.

In this regard, article 30 of the Mining Law states the following:

Mining concessions. A mining concession is an administrative act that grants a mining title, to which the owner shall have a personal right, and which may be transferred once the Sectorial Ministry has mandatorily assessed the suitability of the assignee of the mining rights.

This chapter will expand on this particular issue in the section related to the challenges of the mining industry in Ecuador, but for now it is important to consider this particular issue as the most critical challenge to the mining industry. Unlike other countries in the region, this ‘innovation’ is creating lots of problems for mining concessionaires in Ecuador, which will increase as soon as the projects advance in their exploration, and once the corporations initiate capital raising for the development of a potential mine. Finally, on 15 May 2018, the President, Lenín Moreno Garcés, issued Executive Decree No. 399 in order to merge the hydrocarbons, electricity and mining ministries into one single entity. The reason for this Decree is to reduce bureaucratic costs within the executive branch owing to the economic crisis affecting the country. There is confidence that the new minister will give the mining sector the importance it deserves as a crucial industry for the economic development of the country.

Regulations and granting of mine rights Unlike other countries in the Andean region and the continent, Ecuador has a very particular way of granting mining concessions. In accordance with the Mining Law and its general regulation, to access a mining concession in Ecuador, individuals or corporations must participate in a public tender process where the determining factor to be awarded a mining concession is the economic offer of the interested party. On 1 March 2016, the Energy and Non-Renewable Natural Resources Ministry (formerly the Mining Ministry) issued Ministerial Decree No. 2016-002, subsequently amended by Ministerial Decrees Nos. 2016-014 and 2016-030, which contains the Guidelines for Granting Metallic Mining Concessions. With this background, and considering the purpose of this particular analysis, based on the legal nature of mining rights and with the aim of understanding the difference between the way in which mining rights are granted in Ecuador and other mining jurisdictions in the region, this section will refer to two other countries with a mining industry much more developed than that of Ecuador’s.

Granting of mining rights Chile In Chile, private parties may acquire several mining rights. As Rodrigo Muñoz from Núñez Muñoz & Cía mentions in his chapter on Chile for Getting the Deal Through: Mining 2018, the mining rights that private parties may acquire are as follows:

mining claims (mining exploitation concessions under constitution process), mining peti- tions (mining exploration concessions under constitution process), mining exploration concessions (reconnaissance licences) and mining exploitation concessions (mining licence).

As he also points out in the chapter: ‘All of these different kinds of mining rights are acquired on a first-come, first-served basis.’ Regarding the nature of mining rights in Chile, Muñoz mentions the following: ‘Mining concessions are considered as real immovable rights, having the same legal status of a property, but only regarding the mineral substances.’ This particular conclusion is completely opposed to what was mentioned in the previous section of this chapter regarding the legal nature of mining rights in Ecuador.

Canada As for Canada, John Turner and Michael Bourassa from Fasken mention in their chapter of Getting the Deal Through: Mining 2018 that ‘Prospectors can explore “open” Crown lands (or in Quebec, lands that are privately owned), with a prospecting permit, and can “stake” the mineral rights if the land has not already been located and recorded by another party.’ Moreover, they point out that those rights are as follows:

acquired on a first-come, first-served basis. Land can be located on the ground through traditional staking methods (namely, cutting claim posts and blazing claim lines, in Quebec using government issued tags), but most provinces have now adopted ‘map designation’ in lieu of ground staking, where claims are delineated online using a grid system based on global positioning system technology (in both instances, claims that are ‘ground staked’ or ‘map designated’ are referred to as being ‘located’).6

Ecuador Unlike Chile and Canada, where the system works on a first-come first-served basis, the Ecuadorian system is completely the opposite. In order to access a mining concession in Ecuador, the interested party must participate in a public tender process. The specific characteristics and requirements of the tender process will depend on the surface area of the mining concession. In general terms, there are three different processes: petition, bid and tender.

Petition process This process applies for mining concessions in the range of small-scale mining, and it is considered a direct application process similar to the system used in Chile and Canada known as ‘first-come first-served’. Therefore, to the extent in which the interested party fulfils the requirements that are set forth in the Guidelines for Granting Metallic Mining Concessions, the Energy and Non-Renewable Natural Resources Ministry will award the mining concession.

Bid process In this case, the interested parties initiate the process by mapping the area of interest with ARCOM’s system; claims are delineated online using a grid system based on GPS technology on its website. After this initial stage, the Energy and Non-Renewable Natural Resources Ministry verifies if the interested party fulfils the requirements of the Guidelines for Granting Metallic Mining Concessions and publishes the details of the area on its website for a period,

6 https://gettingthedealthrough.com/area/22/jurisdiction/7/mining-canada/.

Public tender process This process applies for mining concessions of more than 500 hectares in the medium- and large-scale mining regimes. In the process of granting mining concessions within medium- and large-scale mining regimes, there are two different scenarios that must be taken into account. The first is when the Energy and Non-Renewable Natural Resources Ministry initiates the process and the second is when the process is initiated at the request of a private party. This chapter will refer exclusively to the latter. The process initiates by mapping the area of interest with ARCOM’s system. Once the area is plotted, the interested party must file the document with the Energy and Non-Renewable Natural Resources Ministry. The aforementioned document must be filed along with certain information that proves economic solvency for the development of the specific project, and an economic offer for four years of exploration. Once the information is filed and validated, the Energy and Non-Renewable Natural Resources Ministry publishes the terms of reference for the project on its website for other potential interested parties. At the end of this period, interested parties are invited to a hearing at the Ministry in which the authority opens the economic offers of all the parties. Upon concluding this process, the Ministry will award the mining title. From the opening of the mining cadastre to its closure, and according to information from the Energy and Non-Renewable Natural Resources Ministry, 275 mining concessions were granted in the period between March 2016 and December 2017. These 275 concessions are equivalent to 3.72 per cent of national territory. These figures are impressive for a country that was not on the radar of the international investment community 10 years ago. However, way in which mining concessions are granted in Ecuador is not consistent with the way that mining concessions are granted in other countries of the region. In order to become a more competitive jurisdiction, new amendments must change the public tender process of the Mining Law in order to access mining concessions and incorporate the ‘first-come first-served’ system of other jurisdictions. At the time of writing, we understand that the Energy and Non-Renewable Natural Resources Ministry is working on amendments to the Guidelines of Granting Mining concessions. The aim is to correct some inconsistencies in the current process.

Regulations The Mining Law recognises four mining categories: artisanal, small-scale, medium-scale and large-scale. Furthermore, initial and advanced exploration activities are limited to the concessionaires within the areas of their concessions. In order to carry out mining activities in Ecuador, and in accordance with article 26 of the Mining Law, the mining concessionaire must have the following permits: • environmental authorisation; • water permit; and • sworn declaration before a public notary in which the mining concessionaire declares under oath that its activities will not affect public infrastructure.

All mining titles include the right to explore, exploit, process and sell any metallic minerals extracted within the concession. Therefore, regardless of the stage of the activity, the concessionaire shall comply with the aforementioned authorisations. It is necessary to consider an amendment to the Mining Law, especially relating to the granting process of mining concessions, in order to become more competitive in the region. Additionally, it is necessary for the government to understand that the public tender process is not common in any other mining jurisdiction, and it is not coherent with the industry per se.

Challenges for the mining industry in Ecuador There are certainly multiple challenges for the mining industry in Ecuador. However, the most important one is the concept of mining rights as personal rights. For the purpose of this chapter, we will be dividing this section into two parts. The first part will address a detailed analysis of the concept of mining rights, and the second will refer to other challenges that exist in Ecuador for the mining industry.

Main challenge of the mining industry in Ecuador Without a doubt, one of the most important topics discussed around the world with respect to the legal nature of mining rights is the comparative analysis of the types of contracts used in jurisdictions based on common law, and the problems that arise when adapting them in countries with French traditions based on civil codes, which prevail throughout Latin America, as is the case with Ecuador. Among the most discussed concepts of the two systems is the concept of ownership. In general, in the Ecuadorian system there are two types of rights: real rights – those that associate individuals with things; and personal rights – those that associate individuals with other individuals. The subject of real rights, according to article 595 of the Ecuadorian Civil Code (CC), corresponds to the domain, inheritance, usufruct, use or inhabiting, active easement, lien and mortgage; whereas personal rights correspond to liabilities and contracts (article 696 of the CC). This notion is different in the Anglo-Saxon system. The concept known as ‘property rights’ has a more extensive meaning, and a proprietary nature that not only includes assets and property, but also the ‘property’ of contracts and credits. In the Anglo-Saxon system, an individual may have ownership over his or her assets, as well as his or her rights and liabilities with other individuals, and can freely arrange them as seen fit. At a recent event during the biennial ‘Special Institute on International Mining and Oil & Gas Law, Development, and Investment’ of the Rocky Mountain Mineral Law Foundation, the reflection of R Craig Johnson and Carlos Vilhena was illuminat- ing in addressing this matter, because on numerous occasions when we have attempted to explain the problems resulting from classifying mining rights as personal rights in Ecuador, various colleagues, who practise in Anglo-Saxon court systems, did not understand the importance and repercussions of this in Ecuador. Thus, the main shortcoming of the current Mining Law, enacted in 2009, is mining rights being deemed as personal rights. The problem arises from the initial draft that was discussed in the National Assembly, which conceived the entire structure of the law as a real right, but at the last minute, for reasons unknown, the nature of the mining

149 © Law Business Research 2019 The Legal Nature of Mining Rights in Ecuador rights were modified to personal rights, and this gave way to a series of inconsistencies and contradictions. Without going into too much detail, and without trying to be redundant in mention- ing the inconsistencies arising from the personal nature of mining rights in Ecuador, the following points are necessary to mention: • Constructions, facilities and other objects affected by the exploration, exploitation and production of minerals are classified as ‘accessories’ to the mining concession (article 30 of the Mining Law). Nevertheless, accession is a manner of acquiring domain of assets, and therefore it is a real right and not a personal right. There cannot be accessory assets to a personal right, such as the mining concession. • As a mining concession is a personal right, it is, at the very least, debatable that it is sufficient for the concessionaire to become the ‘owner’ (which is a real right) of minerals extracted from the mining concession. • In connection with the foregoing, the Mining Law establishes two types of contracts: exploitation and services contracts (article 39 of the Mining Law), but given the personal nature of the mining concession, only the latter option is feasible, as the state is the owner of the deposit, and the concessionaire, through the authorisation granted by the state, receives payment for the services rendered to the owner of the mine. Consequently, ownership of the extracted minerals, as the mining concession is not a real right, corresponds to the owner of the deposit, which is the state. • If the state maintains ownership (domain) over the concessioned area, the responsibility for maintaining the area free of disturbances – for example, illegal mining – falls on the titleholder of the resources, which is the state. In other words, the party liable for claims, protection orders and other actions is the state, and not the mining concessionaire, which only holds a personal authorisation to perform mining activities within the area. The real right is absolute, as it can be applied to everyone, whereas personal rights are relative, as they can only be applied to the bound party. Therefore, for example, the owner can demand that no individual contravene the application of a real right and, if this is breached, a real lawsuit can be filed; however, a personal suit can only be filed against the debtor. This is a strange aspect, because concessionaires must make a claim to the state, and not private parties, when mining concessions face disturbances caused by private parties. • A similar case involves the ability of the concessionaire to enter into contracts with third parties. As the mining concession is a personal right, it can be argued as to whether or not the concessionaire can enter into operations or lease agreements with third parties, which can normally only be carried out by the owner of the area, which is the state. • The matter is even clearer when dealing with pledges. According to the law, it is possible to pledge the mining concessions; however, if the pledge is a lien against something, is it truly possible to pledge personal rights? Any answer could be heavily dis- puted. The purpose of the real right is a specific thing, whereas a personal right is a human act, whether giving, doing or not doing something. The legal concept of a real pledge contradicts the personal nature of mining rights.

These inconsistencies had gone unnoticed until now. Regarding specific matters, such as the structure of guarantees, for example, various amendments have been made to secondary legislation with the aim of overcoming the limits of personal rights. Apart from these measures, it is understood that certain matters have been improved in the exploitation contracts recently negotiated with the state. Nevertheless, said efforts are useless as the legal inconsistency remains. The true effects of these inconsistencies will be revealed in the future for both funding operations for mining projects, and potential controversies that arise between the state and mining investors, which will be dealt with in international arbitration courts. Without legal reforms that modify the nature of the mining right to a real right, as in Ecuadorian legislation, all of the efforts to resolve this huge inconsistency will just end up being short-term remedies. It is hoped that these inconsistencies do not have lasting effects on the investors.

Other challenges for the mining industry in Ecuador Economic packages With respect to the current economic conditions in Ecuador, it is necessary to point out that the state must adjust, improve and amend such conditions in order to attract mining exploration investments in the years to come. For instance, a reduction in the annual patent fees must be considered, which are way above the amounts of neighbouring countries. The aim should be to adjust these amounts to make them more competitive. In August 2018, the National Assembly approved the Economic Development Law in which it finally eliminated the windfall profit tax from legislation, and adjusted the calculation for capital gains tax. This is a very positive development for the mining industry.

Overregulation and authorisation This issue has become one of the main problems for carrying out mining activities in Ecuador. In accordance with article 26 of the Mining Law, and as it was explained in the previous section, prior to executing mining activities, the mining concessionaire must obtain authorisations from the National Water Secretariat (SENAGUA) and the Ministry of the Environment. At this point, it is fair to say that authorisation from the Ministry of the Environment for initial exploration is a relatively simple process. However, obtaining authorisation from the SENAGUA is really complex and requires many documents, and even a technical visit to the concessions, which could take three to four months.

Consultation processes The issue of prior consultation has recently become one of the main challenges for mining projects in Ecuador, and not just because the duty of prior consultation with indigenous peoples and nations is a duty of the mining concessionaires, but because the state has not done its part properly. What has changed is the culture in the communities regarding this matter, which are starting to effectively use legal control tools. With this development, the mining industry companies must emphasise compliance with the prior consultation processes of each

151 © Law Business Research 2019 The Legal Nature of Mining Rights in Ecuador project, not limiting their actions to the application of the law, but rather incorporating the best corporate social responsibility practices into their corporate DNA.

Illegal mining Another fundamental issue for mining concessions in Ecuador will be the position of the government regarding illegal mining activities, which take place in various parts of Ecuadorian territory. The stance of the government against illegal mining is crucial. These activities, which are now presented as artisanal mining, are negative for the country from every point of view. Activities are financed by clandestine money, with no consideration for the environment, while affecting human rights (child labour and human trafficking, etc), which must be a concern of any government. A clear policy regarding this issue and the eradica- tion of illegal mining in Ecuador would be well regarded by the mining industry and the Ecuadorian population.

Exploration activity by foreign entities in Ecuador The international awards that Ecuador received during 2017 confirm the success of its mining industry. The Mines and Money Americas Outstanding Achievement Awards 2017 presented awards for the Best Country of the Year to Ecuador, Best Explorer in Latin America to SolGold and CEO of the Year to Nick Mather, CEO of SolGold. Additionally, Mines and Money gave an award to Ecuador as the Most Innovative Country in December 2017. These awards are not a coincidence. They are the combination of government decisions and the extraordinary exploration results of mining companies, which have placed Ecuador in the sights of investors. As of the creation of the Mining Ministry (now called the Energy and Non-Renewable Natural Resources Ministry) in 2015, the Ecuadorian government has achieved various milestones, including signing the exploitation contract with Lundin for the development of the Fruta del Norte project, opening the mining cadastre, and starting the construction of the Mirador and Río Blanco projects. Additionally, there is the arrival and return of various companies with well-known experience, such as BHP Billiton, Anglo American, Newcrest and Fortescue. However, the most important mining news is without a doubt the extraordinary results of the Cascabel project of the Australian company, SolGold, which indicate the existence of a world-class deposit that, according to experts, is only discovered every 10 years around the world. During a recent corporate presentation, published on the web page of SolGold, the investment required to develop the Cascabel project was projected using a conceptual economic model with a processing capacity of 40 metric tonnes per annum using the block cave mining method, and the numbers were impressive: US$3 billion capital expenditure, comprising one-third equity and two-thirds debt. An investment of this magnitude will surely impact the GDP of Ecuador by a number of points points, creating new jobs and fostering economic growth, especially in the provinces of Imbabura and Carchi – where the project is located – and in the province of Esmeraldas, home of the port that will be used for exporting the minerals.

Sanctions and the Mining Industry

Andrei Liakhov and Mykola Lytvynenko1

‘What & How & If & When & Why’2 This chapter examines various processes a mining company must follow when it (i) dis- covers that a project it is running or investing into (or both) is likely to be ‘sanctioned’, or (ii) is looking to enter a new jurisdiction with an abundance of natural resources but an unstable domestic situation (tribal wars, United Nations personnel killed, half of the economy unlawfully expropriated, etc) or is in a difficult international situation (bru- tal ruling regime, human rights abuses, war with neighbours, conflict with the Trump administration, etc).

What are sanctions? ‘Sanctions’ seem to be the current flavour of political and economic life throughout the world. New sanctions are being introduced almost every month and it is often difficult to track down who is being sanctioned, how exactly and what for. Since 1966, the Security Council of the United Nations has established 30 sanctions regimes. Only in 2018, the US Office of Foreign Assets Control imposed or updated about 19 sanctions programmes, while the European Union implemented and amended about 95 regulations and decisions regarding imposed sanctions and restrictive measures. Any punitive measure is, potentially, a double-edged sword, particularly when applied to substantial businesses. This is well understood by sanctions ‘designers’ who generally seek to exclude or at least limit, to the extent they can, negative effects on their home country. This drives the choice of sectors to be targeted by sanctions. The nature of

1 Andrei Liakhov is a partner and Mykola Lytvynenko is an associate at Sayenko Kharenko. 2 Bill Wyman, ‘What & How & If & When & Why’ (2015).

153 © Law Business Research 2019 Sanctions and the Mining Industry the mining sector compels sanctions designers to think twice before choosing a mining company as their next target. Nevertheless, a good understanding of the impact a plethora of sanctions might have on a mining business is essential for the success of its operations (and not necessarily in a country directly affected by various sanctions). This chapter seeks to give a general overview of principal sanctions regimes and their likely impact on mining businesses.

Notion and definitions A large part of our perception and understanding of life around us is being driven by the media, which often mixes similar but distinctive concepts for the sake of a hit headline. Sanctions are a hot topic, but to understand their practical impact on a mining (and any other) business, a clear distinction needs to be drawn between measures restricting trade and sanctions per se. The ultimate aim of the former is protection of the domestic market by imposing quantitative restrictions, tariffs, or both, on certain goods. Sanctions, however, may be defined as political or legal measures, or both, which have the following principal aims: • to stop trade or restrict communication with another country in order to facilitate political changes; and • to coerce another state to comply with a its obligations under an international agreement or rules of conduct.

This chapter will focus on ‘sanctions proper’ and will only briefly deal with the general effects of trade restrictive measures on a mining business. Sanctions may have various forms. Article 41 of the Charter of the United Nations offers these examples: the interruption of economic relations and means of communication, and the severance of diplomatic relations. A variety of economic measures sit somewhere between a travel ban for an official of a target state and all-out war, and are often tied in with international or bilateral agreements, or both. This allows a nation that thinks it has been wronged to select from an almost unlimited list of punitive measures. Sometimes, revocation of the most favoured nation status is enough to convey the point. Some sanctions remain in place for many years, including the following: • US Jackson–Vanik amendment; • US Cuba-related sanctions; • UN sanctions against Iraq and North Korea; and • UN and unilateral sanctions against South Africa.

Origins The history of sanctions begins in 432 BC when Athens imposed a trade embargo on its neighbour Megara. Since then, there has been a long history of countries blockading their enemies to compel a change in behaviour. The twentieth century saw an unprecedented rise in the number and types of sanctions. The United States was the first in the sanctions race and continues to be the most prolific user. The modern sanctions race started in 1935 with the League of Nations

154 © Law Business Research 2019 Sanctions and the Mining Industry adopting sanctions against Italy. Then the United States followed suit by introducing trade sanctions against Japan when it entered World War II in 1941. The UN founding fathers understood perfectly well that the short use of collective force sanctions is the most effective international law enforcement tool, and gave the UN Security Council powers to introduce them. Throughout the Cold War, use of UN sanctions was restricted by ideological divisions within the Security Council. However, in a few instances the Soviet Union (USSR) and the United States were able to find common ground. For instance, when UN sanctions proved to be quite effective in persuading South Africa to abolish apartheid, or when comprehensive economic sanctions were imposed against Iraq just after its invasion of Kuwait. In addition to the UN Security Council, the European Union (or other regional organisations) and individual states can adopt sanctions. In the majority of cases, UN sanctions are adopted first, with the European Union and individual states following suit shortly thereafter. Sometimes, the European Union (or other regional organisations, or both) will adopt sanctions without prior action on the part of the United Nations – for example, in connection with the situation in Syria or Yemen. Sanctions by individual states are not uncommon: the United States has about 19 states and 6,300 persons on various Office of Foreign Assets Control (OFAC) sanctions lists. Some Arab states have recently adopted sanctions against Qatar and Yemen; Russia has adopted retaliatory sanctions against several states and the European Union; and Ukraine introduced sanctions against Russia. Sanctions are most effective where UN sanctions are supported by regional and individual states’ sanctions. Iran and North Korea’s sanctions regimes are the two best current examples of effective application of containment and behaviour-changing measures.

Which are ‘international’ and which are ‘domestic’? International sanctions are imposed by multilateral organisations, and domestic sanctions are imposed by national governments. National governments and international organisations like the United Nations and European Union have imposed economic sanctions to coerce, deter, punish or shame individuals, bodies corporate or states that endanger their interests or violate international rules of conduct. They have been used to advance a range of foreign policy goals, including counterterrorism, counternarcotics, non-proliferation, democracy and human rights promotion, conflict resolution and cybersecurity.

Types – which to fear most? And why? Sanctions can be divided into two categories: • comprehensive (or sanctions in a broad sense); and • non-comprehensive (also may be referred to as selective sanctions, targeted sanctions or sanctions in a narrow sense).

A comprehensive sanction prohibits all transactions between its imposer and the sanctioned country. A non-comprehensive sanction seeks to restrict operations of a specific company or sector, or ban certain types of transactions; this sanction could have the most

155 © Law Business Research 2019 Sanctions and the Mining Industry effect on the mining sector of the target country. Globalisation of the mining industry means that sanctions affecting a parent company (eg, Rusal) could also affect its mining operations elsewhere in the world (eg, Rusal’s mining operations in Guinea and Nigeria). The Rusal example is also relevant as the United States imposed sanctions on it because of allegations that its principal shareholder supported Russia’s current government, with which the United States has major disagreements. The following are the ‘most popular’ non-comprehensive sanctions. • A trade embargo is usually the first to be imposed and is often limited to a ban on weapons sales to a target country. The United Nations have several such bans in place. A full trade embargo is rare, with UN Iraq sanctions coming very close to that. These prohibit all trade with the target country, save for under specially approved humani- tarian relief programmes (such as UN ‘Oil-for-food’ for Iraq). Such embargo usually forces mining companies to close or suspend their operations in the target country. Trade embargoes may be partial, and rarely include services. Careful analysis of what is possible under a partial embargo is always useful, even if it appears at first sight that the ban makes mining impossible. The best example is ‘the blood diamond’ embargo, which allowed certain diamond mining operations to continue in countries affected by this embargo (eg, by selling the diamonds through third countries that are not covered by an embargo, just as the National Union for the Total Independence of Angola sold its diamonds through Burkina Faso, and Sierra Leone through Liberia). • Financial sanctions (in particular, asset freezes, and restrictions on borrowings for certain people or companies) often complement trade embargoes, and aim to make payment for illegal imports equally difficult. Although drastic measures such as switching off international payment mechanisms are rare (Iran, North Korea and Sudan come to mind), a comprehensive freeze on all existing funds held by the embargoed state, and a prohibition on making new funds available could be equally effective. Financial sanctions could severely restrict the ability of mining companies to invest into the development of new deposits and take profits out of the country (hard currency regimes in some countries have a very similar impact on the mining sector even in the absence of any sanctions).3 • Export licences for goods, software and technology, which could be used in sectors targeted by other sanctions. These aim to prevent the development of targeted sectors through the supply of modern equipment and technology. Though depriving oil companies of access to modern equipment could prevent them from developing new oil fields, reliance on modern extraction equipment is far less crucial in the mining sector where modern technology affects profitability and safety, but not the ability to develop reserves and resources (with very rare exceptions). • Travel and visa restrictions for targeted individuals and country travel bans. The first comprehensive prohibition on all flights to and from an embargoed state was introduced in respect of Libya.4

3 Some countries (eg, Ukraine in 2014–2015) may from time to time impose restrictions on capital repatriation, thus drastically impeding the flow of new investments. 4 Resolution 748 (1992) of the United Nations.

In addition, sanctions may be further divided into two categories: • direct (which influence a particular sanctioned person, its policies or allegations (or both), or operation); and • indirect, including, but not limited to, secondary sanctions, prohibiting individuals and bodies corporate from dealing with another body corporate, which in turn does business with a sanctioned organisation. Secondary sanctions are the most dangerous, as a miner could almost accidentally get caught by them. Enhancing ‘know your partner’ procedures is probably the most effective tool to avoid being sanctioned yourself.

Direct and indirect effects Sanctions relatively rarely target the mining sector directly. A CEO of a major mining company stated recently that without him and his company there would be no Silicon Valley, no Tesla and no solar power. Although it may technically be true, sanctions designers rarely take the ripple effect into consideration. However, even they seek to limit likely damage to only the immediate target. And it just might be that this statement by the CEO summarises the rationale for the cautious approach of sanctions designers to the mining industry. South African and Rhodesian mining sectors were part of the UN anti-apartheid sanctions package in the 1960s and the 1970s. In the 1990s, the diamond extraction industries in several African states were targeted by the ‘blood diamonds’ programme. The United States has recently imposed sanctions on an Israeli entrepreneur and his companies for his involvement in ‘opaque and corrupt mining deals in the Democratic Republic of Congo’. In-house counsel need to analyse almost all economic sanctions in great detail. Sometimes, the wording of sanctions is exceedingly vague (which is becoming a general rule with unilateral US sanctions). This allows for significant flexibility in their interpretation and application, depending on the level of pressure and effect the imposer wants to achieve. This is very dangerous for a mining company doing business in a target country. If the imposer chooses to apply a stricter interpretation of the sanction’s wording or active application to specific projects, the ripple effect could reach companies that were neither intended as targets nor operating in the target sector. This raises further risks for a mining company operating in or planning to enter a country that is subject to sanctions. Risks could be summarised as the indirect application of sanctions to mining companies. Some can be more obvious than others. Any sanction affecting the flow of money in and out of the target country would be taken into account by the miner’s risk assessment team, either when introduced (ideally, when the intention to impose is announced) or when the company is assessing its entry into a sanctioned country. But there are some sanctions that may not be immediately recognised as being capable of affecting the mining sector. A good example would be a situation where the OFAC would cause the liquidation of an otherwise perfectly solvent bank that provided money laundering services to a drug cartel. A mining company having accounts with a sanctioned bank would stand to lose almost all of its money kept in its accounts; its mining operations would likely be interrupted until either new accounts are opened and aid from its overseas parent could be arranged, or some emergency facility could

157 © Law Business Research 2019 Sanctions and the Mining Industry be arranged with its new bankers. Another example of the indirect effect of sanctions could be the inability to obtain vessel or cargo insurance for mining company cargoes exported by sea. Restrictions imposed by sanctions on the supply of lubricants (or chemicals required for heap leaching) to a target country could result in severe limitations on the ability of mining companies to operate extractive processes. Though relevant sanctions are imposed on shipping to affect transportation of hydrocarbons, the wording used could cover ‘all raw materials’ of a certain geographical origin, which would effectively preclude principal insurers from issuing policies covering such cargoes. A mining company might ‘suddenly’ find itself dealing with a sanctioned body corporate (if the imposer decides to put on pressure) and will be forced to rethink its supply or sales chains, or both. The most recent examples are Rusal, Glencore and DGI Group of Companies. Sanctions applied against their principal officers and shareholders affected all of their respective suppliers and customers, and had a wide-ranging ripple effect through south- ern Africa and some parts of Latin America. One side effect of these particular sanctions was a sharp rise in non-ferrous metals prices on commodity exchanges, and the stocking of palladium and nickel by the automobile and electric battery manufacturing industries in anticipation of further sanctions against Norilsk Nickel – one of the major producers of these metals. Although the above example is specific to a particular region, it demonstrates the importance of understanding regional specifics, and determining areas likely to cause incoming mining company problems with international and domestic sanctions polic- ing bodies. There is no universal tool to neutralise the effect of secondary sanctions that an in-house risk assessment and legal team could offer to the management of a mining company. The regular audit of the supply chain and customers could help alert the management to a risk of dealing with a particular supplier or customer. Since the end of World War II, the mining sector has been subject to direct sanctions only three times: • in 1986 South Africa’s most important trading partners (the United States, the EC and Japan) imposed economic sanctions, some of which were directed at the South African mining sector; • in 2003 the United States imposed sanctions against Burmese mining companies that were lifted in 2016 in support of democratic processes in Myanmar; and • following its withdrawal from the Joint Comprehensive Plan of Action early in 2017, the United States reimposed sanctions on Iran, which included a total ban on trade in Iranian gold and precious metals, and the sale or supply to or from Iran of graphite, raw or semi-finished metals such as aluminium and steel, coal and software for integrated industrial processes (such as ore smelting, heap or bio leaching, etc).

Although Cuba has been under severe US sanctions since 19 October 1960, these do not directly mention the Cuban mining industry. The only sanctions directly affecting the Russian mining sector have been imposed by the United States against Rusal, the second-largest aluminium producer in the world, and its principal shareholder, Oleg Deripaska. These affected Rusal’s operations outside of Russia as well, which was obviously not originally planned. At the time of writing,

Rusal is discussing with the US Department of Justice the terms and conditions of the waiver of its sanctions (with personal Deripaska sanctions staying in place).

Trading with the enemy Trade never stops. Even in times of war, enemies find ways to trade. All adversaries in World War II traded with each other irrespective of how hard they fought each other; North Vietnam kept buying US agricultural equipment (and American cigarettes for its army) throughout the 1960s and 1970s; China kept its commercial ties with Vietnam during the Chinese–Vietnamese war of the late 1970s–early 1980s; ISIS traded Syrian and Iraqi oil for necessary supplies until the Russians bombed them; and the USSR traded with the Mujahideen Northern Alliance for most of the Soviet–Afghan war in the 1980s. All modern (post-WWII) sanctions are not absolute. Even Cuban, North Korean and Iraqi sanctions allowed some trade between the imposer (the United States and the United Nations (and others in the case of North Korea)). The anti-apartheid sanctions were quite limited in scope and were aimed to show international support for the African National Congress rather than cause actual harm to the South African economy. Trade with the most heavily sanctioned countries is usually allowed on humanitar- ian grounds (UN ‘Oil-for-Food’ Iraq programme, UN North Korea trade programme, US Cuban ‘Medical Aid’ trade arrangements, etc). Sometimes, the sanctioned country exports something unique, desperately required by the imposer (eg, South African uranium and thorium). In such cases, the imposing country either completely excludes the unique products from the relevant sanctions regime, or introduces a licensing mechanism, where importation of each shipment of the relevant product from the sanctioned country requires the importer to obtain a special licence. In the modern world, there are very few goods that are produced exclusively by one manufacturer. There are plenty of hotly competing suppliers for most equipment, technology and material used in the mining industry. Generally, it is not very difficult to find an alternative supplier of a particular piece of equipment or a spare part, should the original manufacturer find itself under sanctions. It follows that a mining company will have an uphill struggle to convince a sanctions office (eg, the OFAC) to issue an importation licence for a particular item from a sanctioned manufacturer. The licensing process is designed by the sanctions administrators in such a way as to scare away all but the most desperate applicants. This is understandable, as licensing out sanctions is permitted by the regulators as an exceptional measure of last resort. This approach dictates both the initial eligibility criteria, how detailed the required documentation must be and the level of scrutiny by the licensing panel. It could take several months or more to get an OFAC licence to import a sanctioned item into the United States. As regards the European Union, each EU member state is responsible for handling the licensing process subject to its own legislative requirements (eg, in the United Kingdom, it could take about four weeks for the Office of Financial Sanctions Implementation (OFSI) to issue a licence). Since companies operating in the mining industry may be subject to financial sanctions, such companies may be required to get licences from OFSI and the Export Control Organisation, in particular, when such companies are engaged in the activities of

159 © Law Business Research 2019 Sanctions and the Mining Industry importing and exporting goods. The OFSI can only issue licences where there are specific and relevant licensing grounds, which can be found in the legislation underpinning each particular financial sanctions regime.5

Why worry? Unfortunately for miners (and fortunately for lawyers), large parts of the world’s natural resources are located in regions and countries affected by a variety of different sanctions. Developing a good working understanding of sanctions imposed against a particular country where a mining group has (or intends to have) exploration, development and extraction operations allows the mining group to achieve its business goals without subjecting itself to public and regulatory scrutiny and criticism, which could, under certain circumstances, lead to major financial and reputational losses, and personal liability of persons exercising control (usually directors, senior officers and controlling shareholders) of the mining group. Mining is the backbone of any economy. Being affected by sanctions could cause the deterioration of local relationships without which no mining operation could be successful. Stress and damage caused to local communities by scal- ing down mining operations because of (ultimately) a mistake made by a risk assessment officer who allowed a contract to be made with a sanctioned person will be difficult to mitigate. The mining industry has been relatively lucky so far. It has avoided the wrath of direct sanctions, which seem to focus almost exclusively on the hydrocarbons extractive sector, and technology and financial services. There are many reasons for that: an obvious one is that the imposing countries (the United States and the European Union) need products of the mining industry, and sanctioning even one large miner could cause substantial economic damage to the imposer. The best (and only current) example is Rusal – sanctions have hit it hard, and are also causing the Boeing corporation to fall behind its aircraft delivery schedule, and stockpile unfinished aircraft until it can source enough aluminium from elsewhere.6 Such a ‘privileged’ position does not mean that mining companies are immune from sanctions. Mining companies could be affected by secondary sanctions and the indirect effect of sanctions imposed on other sectors. This makes tracking and managing sanctions (not limited to the obvious sanctions imposed against the country a mining company is operating in) an important part of its compliance mechanism.

Tracking sanctions – a key element of corporate compliance mechanisms Tracking and managing sanctions is quickly becoming an important and separate part of corporate compliance mechanisms. Until recently, mining companies had to deal with sanctions-related issues relatively rarely. These issues usually came up either when a mining company was considering entry into a new country or during a pre-initial public

5 The OFSI HM Treasury ,‘Financial Sanction Guidance’, available here: https://assets.publishing. service.gov.uk/government/uploads/system/uploads/attachment_data/file/685308/financial_ sanctions_guidance_march_2018_final.pdf. 6 Boeing Corporation press release, 8 August 2018, 1.57 pm ET, statement by CFO, Greg Smith, at an analyst conference.

160 © Law Business Research 2019 Sanctions and the Mining Industry offering (IPO) disclosure process. With sanctions rapidly becoming a feature of everyday life, even previously unaffected sectors such as mining are now obliged to respond to challenges the sanctions present. Having sanctions compliance as a separate business process does not create a safe harbour per se, but allows the management of a mining company to identify and manage situations and circumstances that could result in sanctions-related damage and liabilities. Most major miners have put in place separate sanctions compliance policies. The main elements of such policies are usually (i) a sanctions risk assessment; (ii) screening and monitoring of counterparties (suppliers, service providers and customers); (iii) analysis and reporting of potential sanctions-related circumstances; and (iv) ensuring compliance by counterparties. The sanctions compliance group must keep a record of sanctions put into effect against other states or territorial entities, bodies corporate and individuals by the United Nations, the European Union, the United States and regional international organisations (the Organisation of African Unity, the Arab League, etc) relevant to each country a mining company operates in. Subscription to all major sanctions-related databases and news- letters is a useful tool to keep up with major sanctions updates. The sanctions records shall be limited to those sanctions that are relevant for the company’s business activities. Sanctions records shall be used for screening and monitoring of the existing counterparties and prospective partners. The initial screening should be complemented by a periodic review and re-screening of the existing relationships, designed to flag counterparties that were affected by sanctions in the reporting period. The range of actions available to the company if it finds that one of its business partners was hit by sanctions is rather broad. However, unlike the financial services sector, no sanctions regulator provides an automatic ‘report and terminate’ safe harbour whether and when a mining company finds out that one of its counterparties has become affected by sanctions. Simple termination of the relationship may not work. It is advisable to find details of the circumstances that led to the counterparty being affected by sanctions, which sanctions it was affected by and how. Having assessed the risks for the company with this information in hand, the decision must be taken (and sometimes announced publicly) whether to terminate (or suspend) this relationship. All communications and information related to an investigation of a business relationship with the affected counterparty must be kept separate together with the information and communications in relation to the investigation of sanctions-related circumstances. The company must seek to ensure that its business partners are aware of the sanctions compliance policy. Because if risks arise from the indirect effect and application of secondary sanctions, it would be unreasonable to insist on a hard undertaking by each business partner to comply with the company’s sanctions compliance policy. At best, the company may seek to include relevant best endeavours provisions into its contracts and standard terms of business, together with an obligation to keep the company notified of all circumstances that could give rise to sanctions being applied to the counterparty.

When do you need to worry? Most modern conflicts give rise to international, regional or individual sanctions. Unless a conflict in the country where a mining company operates has a direct impact on its operations, the fact that the country is affected by the conflict and may be affected by sanctions should not cause immediate termination or suspension of mining operations. However, business as usual should not continue as well. Miners should assess the risks of staying in the country, including risks of being subjected to, and affected by, sanctions. The other common situation where the management of a mining company needs to start worrying about the possibility of sanctions affecting it is when one of its principal customers or suppliers is hit by sanctions. If sanctions compliance concludes that termination of such relationship would relieve the company of being itself subjected to a sanctions regime, the management will only have to worry about finding a suitable substitution. However, if the risks of being affected by the sanctions are not eliminated by the termination of the relationship, the management needs to review all business processes related to this relationship to determine areas that require remedial action.

Do sanctions work? Although sanctions have become a common diplomatic tool for nations, especially in the decades after the end of the Cold War, political scientists say they are not particularly effective. Though international (mainly UN-sponsored) sanctions are typically effective, there is no generally accepted view on the effectiveness of sanctions introduced by individual countries or regional organisations (the European Union being considered a single sanctions imposing entity). Some experts argue that individual sanctions are a double-edged sword and affect both the imposer and the target, others argue (mostly on the examples below) that these have a slow, strangulative effect on the target, ultimately resulting in catastrophic consequences for the target sector or country. Sanctions work best through a combination of international and domestic sanctions. One of the most famous examples is the near-total economic isolation imposed on South Africa in the 1980s in protest against its policy of apartheid. Following the imposition of a UN trade ban, the United States and many other nations ceased trading, and companies divested their holdings, which in conjunction with strong domestic resistance led to the end of South Africa’s white minority government in 1994. An additional argument put forward by sanctions sceptics is that they are most often felt by innocent civilians and not the intended government officials. UN sanctions imposed against Iraq in the 1990s, for example, caused prices for basic commodities to spike and extreme food shortages, and triggered outbreaks of disease and famine. Despite the crushing impact these sanctions had on the general Iraqi population, they did not lead to the ouster of their target, Iraqi leader Saddam Hussein. In an increasingly globalised world, unilateral sanctions face huge obstacles – even when imposed by the largest economy. A landmark study published in the 1990s by the Peterson Institute for International Economics found that unilateral US sanctions achieved their foreign policy goals only 13 per cent of the time. And, the longer sanctions are in place, the less effective they become, as the targeted nations or individuals learn how to work around them.

Rare instances where unilateral sanctions work involve countries that have extensive trade relations with the imposing country. If the target is not dependent on trade with the imposing country, the effect of the economic pressure will be low. In addition, when a country faces sanctions, it can often seek commercial ties elsewhere. This was the case with Cuba. When the United States imposed sanctions on its former trading partner after Fidel Castro came to power, Cuba turned to the communist bloc for help. Iran has diversified its economy in the face of international and individual sanctions, shifting trade to the East and increasingly selling oil and buying goods in China, Pakistan, India and other Asian countries. The answer to such diversification is secondary sanctions, which are imposed on bodies corporate and individuals trading with companies that trade with the target country. The best current example is where the United States announced its intention to impose secondary sanctions against foreign companies that trade with Iran, barring them from doing business in the United States. Extraterritorial sanctions such as these are opposed by other countries as a violation of international law. Such secondary sanctions are dangerous as they are capable of affecting almost an unlimited number of companies without them even knowing why they are suddenly included in an update email from the OFAC.7 The above gives both sceptics and sanctions designers rich food for thought. Sceptics very often underestimate the containment effect the mere threat of sanctions may have on the target state or sector. This threat stage together with the imposition stage form the basis for valuing the effectiveness of sanctions. The interplay of these stages generates predictions of whether sanctions will work at all. Impact evaluation (and therefore an assessment of the sanctions’ effects and their effectiveness) requires counterfactual rea- soning. To evaluate the impact of sanctions on a state or specific person, the first thing to do is to predict what would have happened in a country, or with a specific person, if there had been no sanctions. Then, a state or person subjected to the threat of sanctions should find out what happened to the country or person that has already been subject to such sanctions. This method of valuation of sanctions’ impact could produce results substantially different to the traditional set of arguments used by the sceptics’ school of thought. A very good example is, again, Cuba. Although US sanctions have not achieved their original prime goal of toppling Fidel Castro’s regime, they confined the Cuban economy to survival mode for several decades, and helped to cement widespread opposition to the regime. Sceptics will argue that these achievements are balanced out by mass poverty and starvation on the island, and the emergence of ethnic Cuban criminal gangs in the south-east of the United States.

Monetising risk assessment results – the cost of damage prevention is always lower than the cost of damage control Factoring a sanctions compliance mechanism into overall corporate compliance is a cost. Maintenance of a sanctions tracking regime is also a cost. In-house counsel could find it

7 Companies may find themselves on an OFAC list without understanding why. The OFAC sends emails updating various lists on a regular basis. Most mining companies are subscribed to these updates.

163 © Law Business Research 2019 Sanctions and the Mining Industry difficult to justify incurring these additional costs to the board, particularly if his or her mining company operates in relatively sanctions-free regions. However, the cost of ignoring the need to track sanctions and anticipate the risks could be much higher than even the most generous overheads required to set up sanctions tracking and compliance regimes. Financial markets’ reaction to Rusal and Glencore US-imposed sanctions is a very vivid example of why no company, particularly a publicly traded one, can limit management of political risks to a few paragraphs in its IPO prospectus. The imposition of US sanctions against Rusal has been the first time such actions have drawn in a major publicly listed international mining company with international institutional shareholders. Rusal lost over 50 per cent of its value overnight, its coverage was suspended by most corporate finance houses, and most of its major customers have closed their trading accounts with the group. A situation like that is a nightmare for any miner’s chairman and CEO. Mining is one of the most capital-intensive sectors of the economy, with substantial upsides for anyone investing into it. Mining companies form the backbone of several stock indices, including FT100, SPTSX and ASX200, which comprise mostly mining companies . Having this in mind, a sensible board of a mining company should not hesitate to approve a reasonable sanctions tracking and compliance budget. The cost of accidentally falling into the scope of a sanctions regime makes the cost of prevention insignificant in comparison with potential consequences of sanctions being imposed on a mining (particularly publicly traded) company. It would usually fall to the legal and financial departments of a mining company to run the sanctions tracking and compliance mechanism. It is also advisable (although not yet legally required) to have a short summary of the results of the semi-annual business partners audits included in the interim results announcement. Such disclosure could state that the company has a sanctions tracking and compliance policy in place and that the recent audit confirmed that the company is not trading with any sanctioned persons.

Prevention Each mining company should have a sanctions tracking policy and compliance mechanism in place. Sanctions, watch lists and politically exposed persons (PEPs) lists always need to be a focus of the in-house compliance team when it comes to protecting against reputational, regulatory, financial and strategic risks. The following are useful tips in implementing sanctions checks: • taking a top-down approach to compliance. Guidance from regulatory bodies around the world makes clear that corporate leaders need to understand their organisations’ sanctions obligations to ensure compliance with sanctions regimes. Stakeholders, board members, senior executives and key managers must accept that sanctions compliance is a must; • maintaining up-to-date policies and procedures (as summarised above), including disclosure requirements. A sanctions tracking mechanism must evolve with the sanctions environment. This requires keeping up with sanctions, watch lists and guidance from a number of regulatory bodies, including the United Nations Security Council,

the US Office of Foreign Assets Control, the EU Common Foreign and Security Policy and Her Majesty’s Treasury of the United Kingdom; • notifying employees of these policies and procedures. In addition, third parties that operate on behalf of organisations – whether as sales agents, partners or others – need to understand sanctions compliance expectations; • training employees and third-party agents to ensure they understand sanctions compliance obligations, as well as how to recognise and address sanctions compliance; • implementing a risk-based sanction tracking process. It is advisable to tailor policies to the specific nature, size and risk of each mining operation. Considerations include inherent risks based on an organisation’s products and service, and delivery chan- nels; its size, business model and corporate governance process; and its customer profiles, geographic location and countries of operation; • aligning sanction tracking to third-party due diligence procedures. Due diligence of the supply chains and third parties could be enhanced or simplified depending on the nature of the business relationship. Developing a comprehensive approach that includes sanctions, watch lists and PEP checks in the due diligence procedures helps miners mitigate risk more effectively − right from the start; • auditing and regular reviewing of sanction tracking policies, procedures and training to increase their effectiveness; and • reinforcing policies and procedures with independent audits and testing. Outside verification helps ensure that a sanction tracking programme operates effectively and complies with relevant laws. Depending on a mining company risk profile, the independent audit should take place every 12 to 18 months, and audit results should be reported directly to the board or a designated board committee.

Creating a sanctions committee of the board is a useful tool to control sanctions-related issues and situations. If a mining company has operations in a potentially sanctions-prone region, the sanctions committee of the parent company should have emergency powers to order withdrawal from that region if the risk of getting on a sanctions list outweighs the benefits of staying. The obvious economic benefits of staying (extra cash flow -gen eration, low extraction cost, huge reserves, etc) should not obscure the bigger picture. If a potentially dangerous situation develops, the first thing the sanctions committee should do is to get lawyers to justify their fees and provide clear guidance for the board as to what steps to take and which announcements to make to mitigate the risk of having sanctions imposed on the company. One other lesson from the Rusal affair is that public mining companies need to carefully track who makes substantial acquisitions of their shares, and alert the relevant authorities if a PEP or a sanctioned person made a substantial acquisition. Unfortunately, the Takeover Panel8 has abolished the substantial acquisition of shares together with their reporting requirements, which makes tracking such acquisitions more difficult. Share acquisition by a PEP or a sanctioned person is probably the only scenario where

8 The Takeover Panel on mergers and acquisitions is a self-regulatory body set up to oversee and control public mergers and acquisitions in the United Kingdom. It is also responsible for ensuring compliance with the Code on Takeovers and Mergers.

165 © Law Business Research 2019 Sanctions and the Mining Industry preventive reporting to the authorities could completely mitigate the risk of sanctions being imposed on that miner.

Defence There are no safe harbours in any sanctions regimes. A safe harbour is a set of measures that, once put in place, constitute a defence against liability arising from relevant unlawful behaviour. Operation of a sanctions tracking mechanism will help to avoid secondary sanctions, and is a useful tool to minimise the danger of an indirect effect of sanctions on a mining company. However, if, despite all the preventive measures, a miner finds itself (or a member of its group) under sanctions, the management and its advisers are faced with several tough choices they will need to make very quickly. The first set of questions relates to sanctions per se: who has adopted them, why and how are we affected? Answers to these questions, in addition to helping to understand the scope of immediate, short- and long-term damage to the company (group), could show whether it is technically possible to fight sanctions. It is wrong to assume that sanctions could not be fought. Even the toughest UN and OFAC personal sanctions could be successfully challenged in court. The European case Kadi I9 and subsequent case Kadi II,10 and associated legal battles in Switzerland and the United Kingdom, show that it is possible to force sanction administrators to delist a person from the relevant sanctions lists. It is important to determine early on which parts of the mining company or group have been affected by sanctions, and whether ring-fencing these is practical or would save other parts of the company or group from the sanctions’ effects. It is best to discuss such ring-fencing with the imposing authority to determine whether such exercise would allow the rest of the group to continue business as usual. Forgotten off-balance sheet holding structures, and various box structures, could be the starting point for the ring-fencing exercise if the imposing authority agrees to limit sanctions to the ring-fenced part of the business. The management of the sanctioned company also needs to think about challenging sanctions in court. Such challenge is never easy, particularly because sanctions design processes are conducted in secret, often using classified information that stays classified even after sanctions have been announced. Although it may seem that the company would be fighting sanctions blind, fine-tuned corporate compliance and sanctions tracking mechanisms could reveal information sufficient for the challenge to the sanctions to be successful. That would allow the discovery of the reason for the sanctions and help lawyers to mount a successful defence. Even generally reluctant US courts have recently issued limited but notable decisions that may allow successful challenges. However, such court cases could last years and the effect of an all-out asset freeze would be felt instantaneously. This dictates the need for two parallel processes:

9 Kadi & Al Barakaat International Foundation v Council of the European Union and Commission of the European Communities (2008) c-402/05. 10 Case T-85/09 Kadi v Commission [2010] ECR II-5177.

166 © Law Business Research 2019 Sanctions and the Mining Industry petitioning the imposing authority and filing claims in courts. The best example to date is Al Haramain Islamic Fund, Inc v US Department of Treasury11 where a petition to the OFAC to pass classified information to the court was submitted together with the claim challenging the designation of the claimant as a specially designated global terrorist. This dual-track approach may produce the required result much quicker than litigation proper, and may provide some interim relief. The reason being that the imposing authority may have based its decisions on erroneous or incomplete information, or simply could have misinterpreted perfectly innocent data; a Syrian bank managed to have its designation set aside following a dialogue with the OFAC. Establishing a dialogue with the imposing authority and mounting a legal challenge is vitally important. And it may produce the result. However, much is being said in the media about lobbying the authorities as a way to lift sanctions. Most of these reports relate to preventive lobbying, rather than post-designation efforts. Most of the reported ‘successful’ lobbying only managed to soften the blow, but not totally exclude the relevant company from sanctions.12 These media stories contain numerous references to the quantum of money spent on lobbyists and their names, but very reserved (if any) commentaries from the ‘saved’ principals. The reason for that is obvious – lobbying has limited value in a post-designation fight, and is best used as a sanctions risks management tool. When a cost–benefit analysis is applied to sanctions-related lobbying, its effectiveness becomes even less obvious.

11 Al Haramain Islamic Fund, Inc v US Dep’t of Treasury, 686 F3d 965, 982 (Ninth Circuit, 2011). 12 See, for example, a story about ZTE’s successful lobbying campaign, published by The New York Times on 1 August 2018.

Global Mining Resource Disclosure

Brian E Abraham1

The growing influence of the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) in mining resource disclosure, the membership by most of the critical mining and finance countries around the world and the clear movement to common disclosure requirements by regulators will only continue to grow. There are already a number of codes around the world, such as the Canadian Institute of Mining Metallurgy and Petroleum (CIM) – of which certain definition standards are law in Canada by virtue of National Instrument 43-101 (NI 43-101); the Joint Ore Reserves Committee (JORC) in Australasia; the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC) in South Africa; Industry Guide 7 in the United States, which is moving towards accepting CRIRSCO definitions; NAEN in Russia; and the Pan-European Reserves and Resources Reporting Committee (PERC) in Europe. Most mining companies are listed in Canada and the United States, and the rules apply to such issuers already, with US changes in the works. On 31 October 2018, the United States Securities and Exchange Commission (SEC) announced new rules to modernise property disclosures required for mining registrants, to become effective for their first fiscal year on or after 1 January 2021. This chapter will also cover how regulators accept and adopt policies for qualified and competent persons, etc. As we note under NI 43-101, more organisations are now being recognised as having their members accepted as qualified persons. Modern day rules for resource disclosure in the mining industry owe their advent to the Poseidon bubble, which was triggered by the company Poseidon NL’s discovery of

1 Brian E Abraham is a partner at Dentons Canada LLP. The author would like to thank Emily LeDue, articling student at Dentons, for her research assistance.

168 © Law Business Research 2019 Global Mining Resource Disclosure a nickel deposit in western Australia, in September 1969. At that time, Poseidon shares had been trading at A$0.80 each, and peaked at A$280 each in February 1970. As a result, the Australian government established the ‘Rae Committee’, which, in 1974, recommended changes to the regulation of stock markets, leading to Australian securities legislation. Ironically, the deposit subsequently became a mine, which operated for a number of years. JORC was established in 1971 and was sponsored by the Australian mining industry. It comprises representatives of the Mineral Council of Australia, the Australasian Institute of Mining and Metallurgy, and the Australian Institute of Geoscientists, as well as representatives of the Australian Stock Exchange, the Financial Services Institute of Australasia and the accounting profession. The JORC Code was imposed as a mandatory system for the classification of minerals, exploration results, mineral resources and ore reserves according to the level of confidence in the geological knowledge of the area – and that gained from a specific investigation – and technical and economical considerations for public reporting. The JORC Code was first published in 1989 and is incorporated in the listing rules of the Australian and New Zealand stock exchanges. The JORC Code was the first code that set out in detail the requirements for disclosure on mining properties, and forms the genesis for a number of codes that have adopted its concepts in countries around the world. Scandals in the mining industry are not, however, limited to the Poseidon bubble. Another significant scandal concerns Bre-X Minerals Ltd, a Canadian company that allegedly discovered the Busang gold deposit. Bre-X started out on the Alberta Stock Exchange and was listed in 1989 at C$0.30 a share. In October 1995, Bre-X announced it had discovered a deposit with approximately 2.7 million ounces of gold. Analysts believed the find might have 30 million ounces, and John Felderhof, a company geologist, stated in October 1995 that it could be 45 million ounces with ‘the potential of becoming one of the world’s great ore bodies’.2 Michael De Guzman, a Filipino geologist, hinted at 100 million ounces, and, in March 1996, the shares were listed on the Toronto Stock Exchange (TSX). There were numerous interference activities by the Indonesian government. In March 1997, De Guzman disappeared after falling from a helicopter. In February 1997, Freeport-McMoRan Copper and Gold Inc, a US company, negotiated an agreement respecting the property, and announced in late 1997 that there were ‘insignificant amounts of gold’ at the Busang deposit. Bre-X’s market capitalisation had already collapsed by C$3 billion. As a result of the Bre-X debacle, the Mining Standards Task Force was established by the TSX and the Ontario Securities Commission, and it recommended sweeping changes to disclosure for mining companies listed on exchanges in Canada. Unlike Poseidon, which had nickel, Bre-X had no gold other than the nearby placer gold that was used to salt the drill core samples. The Canadian Securities Administrators (CSA) established NI 43-101 (or the Standards of Disclosure for Mineral Projects), together with the Companion Policy and the F1 Form, which meant that all reporting mining companies in Canada would be

2 Toronto’s The Globe and Mail newspaper, 30 July 2007.

169 © Law Business Research 2019 Global Mining Resource Disclosure subject to the provisions of NI 43-101 in addition to any disclosure requirements required by the relevant exchange. Notice was given on 3 July 1998, and NI 43-101 came into effect on 14 November 2000. NI 43-101 incorporated, as part of the law, CIM definition standards for mineral resources and mineral reserves. Since 2000, there have been a number of changes made to NI 43-101, as well as notices relating to disclosure under it. In addition, the CIM published guidelines for diamond exploration and lithium brines. Prior to NI 43-101, the Geological Survey of Canada published Paper 88-21, which dealt with disclosure for coal properties, including a category for ‘speculative’ resources; however, this category is not accepted by regulators. In the United States, the SEC has Industry Guide 7 regarding disclosure for mining companies. Partly owing to the implementation of the JORC Code and NI 43-101, various exchanges3 also implemented their own disclosure rules. The pathway to today’s disclosure is beginning to converge, perhaps as a result of the establishment of CRIRSCO. It comprises organisations around the world with mining as their focus, and much of the current disclosure in the industry is derived from CRIRSCO standard definitions. The JORC Code introduced the concept of a ‘competent person’, and NI 43-101 adopted a similar definition in ‘qualified person’. CRIRSCO has a number of defined terms, including ‘inferred resource’, ‘indicated resource’, ‘measured resource’, ‘probable reserve’ and ‘proved reserve’, which closely correspond to CIM definitions, although there is some difference in the definition of inferred resource. In addition, CRIRSCO defines a ‘scoping study’, a ‘pre-feasibility study’ and a ‘feasibility study’. The scoping study is similar to the ‘preliminary economic assessment’ (PEA) as set out NI 43-101. PEA is not a defined term under CIM definitions but is a creature of NI 43-101 itself. In June 2016, the SEC announced proposed rules to modernise the disclosure requirements for mining companies in order to align them with industry and global regulatory practices and standards. The proposed rules were, for the most part, in keeping with industry standards, with the exception of certain areas where the requirements for disclosure such as ‘grades’ and ‘recoveries’ at various development stages of mining4 would also be required for reporting. From a technical perspective, some of these concepts would be extremely difficult to determine in advance. As a result of the proposed SEC rule, the Society for Mining, Metallurgy & Exploration (SME) in the United States proposed, in July 2017, the ‘SME Guide for Reporting Exploration Results, Mineral Resources and Mineral Reserves’.5 It is a comprehensive document and provides significant guidance with respect to mining disclosure. However, the SME guide is not law. Industry Guide 7, which only permits disclosure of proven reserves, is the law in the United States, although companies, such as those in Canada

3 Including the TSX, TSX Venture Exchange (TSXV), the Hong Kong Stock Exchange (HKEX) and the Australian Stock Exchange. 4 Such as ‘the deposit’, ‘prior to processing‘, ‘processing’ and ‘recovery’. 5 This document was prepared by the Resources and Reserves Committee of the SME.

170 © Law Business Research 2019 Global Mining Resource Disclosure with joint trading in Canada and the United States, can disclose NI 43-101 information such as resources, provided cautionary language is used. Other organisations have created reporting committees, such as PERC and SAMREC – which last published its code in 2016. In addition, the Comissão Brasileira de Recursos e Reservas (CBRR) published the ‘CBRR Guide for Reporting Exploration Results, Mineral Resources and Mineral Reserves’ – the latest edition being in 2016. In Chile in 2015, the Comisión Calificadora de Competencias en Recursos y Reservas Mineras (the Mining Commission) published the ‘Code for Reporting of Exploration Results, Mineral Resources and Mineral Reserves’, with government and industry input. Other countries have also published codes, including Russia – the NAEN Code ‘For the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves’ in October 2011. There is more than one Russian code; however, the only code accepted by CRIRSCO is the NAEN Code. Kazakhstan published ‘A Code for the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves’ in June 2016. Mongolia published ‘A Code for the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves’ in 2014. Many of these codes have adopted the CRIRSCO definitions with some changes to accommodate local activities and mining operations. There are other regulatory schemes that affect the industry, including the rules of the HKEX under Chapter 18, which adopted the CIMVal Standards and Guidelines for the Valuation of Mineral Properties endorsed by the CIM in February 2003. The Singapore Exchange has disclosure requirements for mineral, oil and gas companies in Practice Note 6.3. The Johannesburg Stock Exchange sets out disclosure requirements for mineral companies in section 12 of its rules. The Australian Securities Exchange, in its listing rules under Chapter 5, sets out requirements for additional reporting in mining, oil and gas production and exploration activities, and the Australian Securities and Investments Commission provides a ‘perspective on resources and reserves reporting’, which was last revised in April 2013. In Europe, the London Stock Exchange has a note for mining, and oil and gas companies dated June 2009 under the AIM6 listing requirements. The London Stock Exchange adopts the AIM Guidance.

Exchanges The TSX has its ‘Disclosure Standards for Companies Engaged in Mineral Exploration, Development and Production’, as set out in Appendix B of its company manual. The TSX and the TSXV also have listing requirements for exploration and mining companies. In the United Kingdom, in January 2018, the Financial Conduct Authority published listing rules regarding mining companies.

6 Alternate investment market of the London Stock Exchange.

The European Securities and Markets Authority published regulation No. 809/2004 regarding prospectus directives and recommendations. A consultation paper was published in September 2012. The SEC has Industry Guide 7 dealing with mining company disclosure. Discussions are currently underway with the SEC and industry representatives, including the SME and the National Mining Association with respect to the proposed SEC mining disclosure rules.

CRIRSCO CRIRSCO was formed in 1994 under the auspices of the Council of Mining and Metallurgical Institute (CMMI), a group of representatives of organisations that are responsible for contributing and developing mineral reporting codes and guidelines: • Australasia (JORC); • Brazil (CBRR); • Canada (CIM); • Chile (the Mining Commission for the Qualification of Competitiveness in Mineral Resources and Mineral Reserves); • Colombia (the Colombian Commission for Natural Resources and Ore Reserves); • Europe (PERC); • Indonesia (Komite Bersama – KCMI); • Kazakhstan (Code for the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves); • Mongolia (Mongolian Resource Code); • Russia (NAEN); • South Africa (SAMREC); • Turkey (the National Mining Reserve and Resource Reporting Committee); and • the United States (SME).

The combined market capitalisation of mining companies listed on the stock exchanges of these countries accounts for a large majority of the listed capital of the mining industry. The international initiative to standardise market-related reporting definitions for mineral resources and mineral reserves started at the 15th CMMI Congress at Sun City, South Africa in 1994. The mineral definitions working group (later called CRIRSCO) was formed after a meeting at that Congress, and was made up of representatives from most of the countries listed above, with the primary objective to develop a set of international standard definitions for the reporting of mineral resources and mineral reserves. In 1997, the original five participants reached agreement (the Denver Accord) for the definitions of the two major categories – mineral resources and mineral reserves – and their respective subcategories: measured, indicated and inferred mineral resources, and proved and probable mineral reserves. In 1999, agreement was reached with the United Nations Economic Commission for Europe, which had, since 1992, been developing an International Framework Classification for Mineral Reserves and Resources (UNFC), incorporating the CMMI CRIRSCO resource and reserve definitions for those categories that were common to both systems, providing international status to the CMMI CRIRSCO definitions.

Following these agreements, an updated version of the JORC Code was released in Australia in 1999 (and more recently in 2012), followed by similar codes and guidelines in South Africa, the United States, Canada, the United Kingdom, Ireland, western Europe, Chile and Peru. The JORC Code has played a significant role in the development of standard definitions for the codes and guidelines. The similarity of the various national reporting codes and guidelines has enabled CRIRSCO to develop an ‘International Minerals Reporting Code Template’ of ‘core code and guidelines’ for jurisdictions wishing to adopt its own CRIRSCO-style reporting standard, recognising country-specific requirements such as legal and investment regulations.

Standard terms The following are the standard CRIRSCO terms (as of October 2012) to include in reporting standards of all CRIRSCO members subject to the agreement of the respective national reporting organisations: • public reports; • competent person; • modifying factors; • exploration target; • exploration results; • mineral resource; • inferred resource; • indicated resource; • measured resource; • mineral reserve; • probable reserve; • proved reserve; • scoping study; • pre-feasibility study; and • feasibility study.

These terms have been incorporated in the International Minerals Reporting Code Template of CRIRSCO dated November 2013, and the codes and standards of most CRIRSCO members.

General relationship between exploration results, mineral resources and mineral reserves The following information is edited primarily from the CRIRSCO website. Public reports are reports prepared informing the public on exploration results, resources or reserves in documents such as annual and quarterly company reports, press releases, technical papers, websites and presentations. A competent person is a minerals industry professional with membership in an organisation having the power to discipline members. Similar terms exist such as in Canada (qualified person) and Chile (qualified competent person), including requirements of five years’ minimum relevant experience in the mineralisation or deposit type under consideration.

Modifying factors commonly applied include converting resources to reserves in such areas as the following: • mining; • processing; • metallurgy; • infrastructure; • economics; • marketing; • legal; • environmental; • social; and • governmental, such as: • permits; • exploration targets; and • estimates of the exploration potential of a mining deposit in a known geological setting – stating a range of tonnes, and a range of grade or quality of mineralisation for which there has been insufficient exploration to estimate mineral resources.

This is akin to disclosure on ranges as set out in section 2.3(2) of NI 43-101. Exploration results include data and information generated by exploration programmes, but do not form part of a declaration of mineral resources or mineral reserves.

CIM definition standards These definitions are excerpted from the CIM Standing Committee on Reserve Definitions of 10 May 2014.

Pre-feasibility study A pre-feasibility study is a comprehensive study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where a pre- ferred mining method, in the case of underground mining – or the pit configuration, in the case of an open pit – is established, and an effective method of mineral processing is determined. It includes a financial analysis based on reasonable assumptions on the modifying factors, and the evaluation of any other relevant factors that are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral resource may be converted to a mineral reserve at the time of reporting. A pre-feasibility study is at a lower confidence level than a feasibility study.

Feasibility study A feasibility study is a comprehensive technical and economic study of the selected development option for a mineral project, which includes appropriately detailed assessments of applicable modifying factors together with any other relevant operational factors and detailed financial analyses that are necessary to demonstrate, at the time of reporting, that extraction is reasonably justified (economically mineable). The results of

174 © Law Business Research 2019 Global Mining Resource Disclosure the study may reasonably serve as the basis for a final decision by a proponent or financial institution to proceed with, or finance, the development of the project.

Mineral resource A mineral resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality – and quantity – that there are reasonable prospects for eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling.

Inferred mineral resource An inferred mineral resource is that part of a mineral resource for which quantity, and grade or quality are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological grade or quality continuity. An inferred mineral resource has a lower level of confidence than that applying to an indicated mineral resource and must not be converted to a mineral reserve. It is reasonably expected that the majority of inferred mineral resources could be upgraded to indicated mineral resources with continued exploration.

Indicated mineral resource An indicated mineral resource is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of modifying factors in sufficient detail to support mine planning and evaluation of the economic viability of the deposit. Geological evidence is derived from adequately detailed and reliable exploration, sampling and testing, and is sufficient to assume geological grade or quality continuity between points of observation. An indicated mineral resource has a lower level of confidence than that applying to a measured mineral resource and may only be converted to a probable mineral reserve.

Measured mineral resource A measured mineral resource is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are estimated with confidence sufficient to allow the application of modifying factors to support detailed mine planning and final evaluation of the economic viability of the deposit. Geological evidence is derived from detailed and reliable exploration, sampling and testing, and is sufficient to confirm geological grade or quality continuity between points of observation. A measured mineral resource has a higher level of confidence than that applying to either an indicated mineral resource or an inferred mineral resource. It may be converted to a proven mineral reserve or a probable mineral reserve.

Modifying factors Modifying factors are considerations used to convert mineral resources to mineral reserves. These include, but are not restricted to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors.

Mineral reserve A mineral reserve is the economically mineable part of a measured or indicated mineral resource. It includes diluting materials and allowances for losses, which may occur when the material is mined or extracted, and is defined by studies at pre-feasibility or feasibility level, as appropriate, which include the application of modifying factors. Such studies demonstrate that, at the time of reporting, extraction could reasonably be justified. The reference point at which mineral reserves are defined, usually the point where the ore is delivered to the processing plant, must be stated. It is important that, in all situations where the reference point is different, such as for a saleable product, a clarifying statement is included to ensure that the reader is fully informed as to what is being reported. The public disclosure of a mineral reserve must be demonstrated by a pre-feasibility or feasibility study.

Probable mineral reserve A probable mineral reserve is the economically mineable part of an indicated and, in some circumstances, a measured mineral resource. The confidence in the modifying factors applying to a probable mineral reserve is lower than that applying to a proven mineral reserve.

Proven (proved) mineral reserve A proven mineral reserve is the economically mineable part of a measured mineral resource. A proven mineral reserve implies a high degree of confidence in the modifying factors. There are also guidelines for the reporting of coal reserves, industrial minerals, diamonds and gemstones.

NI 43-101 In Canada, the CSA has NI 43-101 together with its Companion Policy and the F1 Form, which must be followed when reporting results. Several definitions in NI 43-101, which are somewhat unique, are summarised below. Preliminary economic assessment A preliminary economic assessment is a study, other than a pre-feasibility or feasibility study, that includes an economic analysis of the potential viability of mineral resources. This is similar to a scoping study.

Qualified person A qualified person: • is an individual who is an engineer or geoscientist with a university degree or equivalent accreditation, in an area of geoscience or engineering relating to mineral exploration or mining; • has at least five years of experience in mineral exploration, mine development or operation, or mineral project assessment relevant to the professional degree or area of practice; • has experience relevant to the subject matter; • is in good standing with a professional association; • in the case of a professional association in a foreign jurisdiction, has a membership designation that requires attainment of a position or responsibility in his or her profession that requires the exercise of independent judgement; • is required to have a favourable confidential peer evaluation of the individual’s charac- ter, professional judgement, experience and ethical fitness, or a recommendation for membership by at least two peers; and • demonstrates prominence or expertise in the field of mineral exploration or mining.

Range An issuer may disclose in writing the potential quantity and grade, expressed as ranges, of a target for further exploration, if the disclosure as follows: • states with equal prominence that the potential quantity and grade is conceptual in nature, that there has been insufficient exploration to define a mineral resource and that it is uncertain if further exploration will result in the target being delineated as a mineral resource; and • states the basis on which the disclosed potential quantity and grade has been determined.

There are instructions in the F1 Form (the technical report) that, together with the Companion Policy, provide guidance on technical disclosure. Contents of the technical report include: • title page; • date and signature page; and • table of contents – including figures and illustrations, such as maps, plans and sections.

Requirements for all technical reports (note that this is an edited description and should not be relied upon for report preparation, and is only provided as an example of what a technical report for mining disclosure may ultimately resemble): • Summary – briefly summarise important information in the technical report, including property description and ownership, geology and mineralisation, status of exploration, development and operations, mineral resource and mineral reserve estimates, and the qualified person’s conclusions and recommendations. • Introduction – include a description of the issuer for whom the technical report is prepared; terms of reference and purpose; sources of information and data; and details of the personal inspection by a qualified person.

• Reliance on other experts – the qualified person who prepares or supervises preparation of all or part of the technical report may include a limited disclaimer of responsibility for matters concerning legal, political, environmental or tax matters relevant to the report. • Property description and location – area of property; location; types of mineral tenure (and identifying name or number of each); the nature and extent of the issuer’s title to, or interest in, property rights, access, obligations that must be met to retain property, expiration date of claims, licences or other property tenure rights; to the extent known, terms of any royalties, back-in rights, payments, or other agreements and encumbrances to which property is subject; to the extent known, all environmental liabilities affecting property; to the extent known, permits; and any other significant factors and risks that may affect access, title, or right or ability to perform work on the property. • Accessibility, climate, local resources, infrastructure and physiography – topography, elevation and vegetation; access; proximity to a population centre – and of transport; climate and length of operating season; and sufficiency of surface rights for mining operations, availability and sources of power, water, mining personnel, potential tailings storage areas, potential waste disposal areas, heap leach pad areas and potential processing plant sites. • History – prior ownership of property and ownership changes; type, amount, quantity and general results of exploration and development work undertaken by previous owners or operators; any significant historical mineral resource and mineral reserve estimates; and any production from property. • Geological setting and mineralisation – regional, local and property geology; and significant mineralised zones. • Deposit types – mineral deposit types being investigated or explored for; and the geological model or concepts on whose basis the exploration programme is planned. • Exploration – nature and extent of all relevant exploration work other than drilling, conducted by, or on behalf of, the issuer, including procedures and parameters relating to surveys and investigations; sampling methods and sample quality, whether samples are representative and any sample bias factors; information of location, number, type, nature, spacing or density of samples collected and size of area covered; and significant results and interpretation of exploration information. • Drilling – type and extent of drilling, a summary and interpretation of all relevant results; any drilling, sampling or recovery factors that could materially impact accuracy and reliability of results; for a property other than an advanced property (i) location, azimuth and dip of any drill hole, and depth of relevant sample intervals; (ii) relationship between sample length and true thickness of mineralisation, orientation of mineralisation; and (iii) results of any significantly higher grade intervals within a lower grade intersection. • Sample preparation, analyses and security – sample preparation methods and quality control measures; relevant information regarding sample preparation, assaying and analytical procedures used, and name and location of analytical or testing laborato- ries; summary of nature, extent and results of quality control procedures employed,

and quality assurance actions; and opinion on adequacy of sample preparation, security and analytical procedures. • Data verification – steps taken by the qualified person to verify data in the technical report, including procedures; limitations on or failure to conduct such verification; and the qualified person’s opinion on the adequacy of data. • Mineral processing and metallurgical testing – if mineral processing or metallurgical testing analyses have been carried out, discuss the nature and extent of testing and analytical procedures and summary; the basis for any assumptions or predictions; the degree to which test samples are representative of various types and styles of mineralisation and mineral deposit; and any processing factors or deleterious elements that could have a significant effect on potential economic extraction. • Mineral resource estimates – disclosure of mineral resources must provide sufficient discussion of key assumptions, parameters and methods used to estimate mineral resources; comply with all disclosure requirements for mineral resources; when the equivalent grade for a multiple commodity mineral resource is reported, the individual grade of each metal or mineral, and metal prices, recoveries and other relevant conversion factors used to estimate metal or mineral equivalent grade must be reported; and include a general discussion on the extent to which mineral resource estimates could be materially affected by any known environmental, permitting, legal, title, taxation, socio-economic, marketing, political or other relevant factors.

Additional requirements for advanced property technical reports (referencing economic analysis) are as follows: • Mineral reserve estimates – disclosure of mineral reserves must provide sufficient discussion and detail of key assumptions, parameters and methods used where mineral resources were converted to mineral reserves; for equivalencies, the individual grade of each metal or mineral, and metal prices, recoveries and other relevant conversion factors used; and the extent to which reserve estimates could be materially affected by mining, metallurgical, infrastructure, permitting and other relevant factors. • Mining methods – current or proposed mining methods and summary of relevant information used to establish amenability, or potential amenability, of mineral resources or mineral reserves of proposed mining methods – include geotechnical, hydrological and other parameters relevant to mine or pit designs and plans; production rates, expected mine life, mining unit dimensions and dilution factors used; requirements for stripping, underground development and backfilling; and required mining fleet and machinery. • Recovery methods – available information on test or operating results relating to recoverability of the valuable component or commodity, and amenability of mineralisation to proposed processing methods – where relevant, include a description or flow sheet of the current or proposed process plant; plant design, equipment characteristics and specifications, as applicable; and current or projected requirements for energy, water and process materials. • Project infrastructure – summary of infrastructure and logistic requirements for the project, which could include roads, rail, port facilities, dams, dumps, stockpiles, leach pads, tailings disposal, power and pipelines, as applicable.

• Market studies and contracts: • Summary of reasonably available information concerning markets for the issuer’s production, including nature and material terms of any agency relationships, commodity price projections, product valuations, market entry strategies or product specification requirements. • Identify any contracts material to the issuer that are required for property development, including mining, concentrating, smelting, refining, transportation, handling, sales and hedging, and forward sales contracts or arrangements in place or under negotiation, and terms and industry norms. • Environmental studies, permitting and social or community impact – reasonably available information on environmental, permitting and social or community factors related to project. Consider and, where relevant, include a summary of results of any environmental studies and environmental issues that could materially impact the issuer’s ability to extract resources or reserves; requirements and plans for waste and tailings disposal, site monitoring and water management both during operations and post mine closure; project permitting requirements, the status of any permit applications and post-performance or reclamation bonds; discussion of any potential social or community-related requirements and plans; and discussion of mine closure (remediation and reclamation) requirements and costs. • Capital and operating costs – summary of capital and operating cost estimates, with major components set out in tabular form. • Economic analysis – economic analysis for the project, which includes a clear statement of principal assumptions; cash-flow forecasts on an annual basis using reserves or resources and an annual production schedule for the life of project; discussion of net present value, including impact of taxes, internal rate of return and payback period of capital with imputed or actual interest; a summary of taxes, royalties and other government levies or interests applicable to the mineral project or production, and to revenue or income from the mineral project; and sensitivity or other analysis using variants in commodity price, grade, capital and operating costs, or other significant parameters and impact of results.

Requirements for all technical reports: • Adjacent properties – the report may include relevant information concerning adjacent property if such information was publicly disclosed. Identify the source; and state that its qualified person has been unable to verify information and that information is not necessarily indicative of mineralisation on property that is the subject of the report. The report clearly distinguishes between information from adjacent property and information from property that is the subject of the report; and any historical estimates of mineral resources or mineral reserves are disclosed in accordance with paragraph 2.4(a) of NI 43-101. • Other relevant data and information – additional information or explanation necessary to make the technical report understandable and not misleading. • Interpretation and conclusions – summarise relevant results and interpretations of information and analysis being reported on. Discuss any significant risks and uncertainties that could reasonably be expected to affect reliability or confidence in

exploration information, resource or reserve estimates, or projected economic outcomes. Discuss any reasonably foreseeable impacts of these risks and uncertainties on the project’s potential economic viability or continued viability. A report concerning exploration information must include conclusions of the qualified person. • Recommendations – provide particulars of recommended work programmes and breakdown of costs for each phase. If successive phases of work are recommended, each phase must culminate in a decision point and must not apply to more than two phases of work and whether advancing to a subsequent phase is contingent on positive results in previous phase. • References – include detailed list of all references cited in technical report.

Conclusion The world of mining disclosure is gradually converging because of the efforts of organisations such as the CRIRSCO, JORC, SAMREC and CIM, the application of regulators such as the CSA, and exchanges such as the AIM, TSX, HKEX, ASX and other emerging exchanges like these in South America and Asia. In time, it is expected that disclosure will be common and yet still allow for local rules and regulations unique to such jurisdictions.

About the Authors

Agustina de Abaroa Baker McKenzie Agustina de Abaroa specialises in tax law. She routinely advises on Argentinian and international tax matters, including procedural aspects of Argentine taxes. She has extensive experience in the practice of tax law, advising clients on tax planning, and representing companies in tax litigation cases in federal and provincial courts. In particular, Agustina gives tax advice to foreign mining companies in connection with the Mining Investment Law in Argentina. She is a member of the Buenos Aires Bar Association and the Argentine Association of Fiscal Studies.

Brian E Abraham Dentons LLP Brian Abraham is the Canada co-chair and a global lead for Dentons’ mining group. He is a professional geologist, and his practice involves all phases of mining from exploration, development and production to reclamation. He provides advice on all forms of title reviews, options, leases, purchase and joint venture agreements during the early phases of mineral exploration, and permitting. He also advises on socio-economic, engineering, consulting, construction, operator, equity and debt financing, offtake, processing agreements and reclamation agreements. He is active in a number of industry organisations and is on such committees, including the Mining Technical Advisory and Monitoring Committee (NI 43-101 Committee). Within his practice area, Brian acts domestically and internationally for junior, mid-sized and major explorers, developers and producers as well as engineering, mining and geological consultants, individuals, prospectors, organisations, syndicates and

183 © Law Business Research 2019 About the Authors financiers (debt and equity) in private and public financing. He has also participated in background studies for mineral legislation in British Columbia (BC) and other Canadian jurisdictions, and has advised foreign governments regarding the preparation and implementation of mining legislation. Brian advises clients and prepares opinions on complex legal mineral titles issues in BC, as well as litigation involving title matters, right-to- mine, valuation, expropriation matters and aboriginal issues. He has acted for clients involved in transactions in North and South America, Europe, Asia, Africa and Australia. Brian has also acted for clients in energy-related (coalbed methane) projects in Canada, the United States, Asia, Europe and Latin America.

Juan Martín Allende Allende & Brea Juan Martín Allende is partner at Allende & Brea, co-leads the energy and natural resources practice group and runs the firm’s Asian practice group. His legal practice involves advising foreign and local companies in different areas of law such as mining, corporate, mergers and acquisitions, and finance. Recently, he has been advising local mining companies in their day-to-day operation and associated legal matters, debt and equity financing, and infrastructure projects (particularly expansions). He also actively advises foreign mining companies and investment funds in the acquisition of local mining projects. Mr Allende obtained his JD from Austral University, and did an exchange programme at Duke University. He has also worked abroad at TozziniFreire Advogados, São Paolo, Brazil, and at Niederer Kraft Frey, Zurich, Switzerland. Juan Martín is an active member of the Rocky Mountain Mineral Law Foundation (in 2017 he co-chaired the international section of the Rocky’s annual meeting) and has been recently appointed co-chair of the International Committee of the RMMLF. He is also member of the Inter Pacific Bar Association and the Pacific Rim Advisory Council.

Sergio D Arbeleche Bruchou, Fernández Madero & Lombardi Mr Arbeleche graduated from the School of Law at the Pontifical Catholic University of Argentina in 1998. In 1997 he obtained a pre-master of corporate law at Austral University and took a postgraduate specialisation course in oil and gas at the University of Buenos Aires (2011), and also took an international LLM programme on US law and international business law, graduating cum laude, at Suffolk University (2013). Since 1998, together with Sebastián P Vedoya, he became a key member of the natural resources and environmental departments at top-tier prestigious law firms specialised in such areas of practice. In 2002, he was retained as legal adviser under the United Nations Development Programme, for mining development purposes of the federal mining authority. In 2013, he worked as coordinator of the Legal Affairs Committee of the Argentine Chamber of Mining Entrepreneurs (CAEM), and is currently coordinator of the Glaciers

Committee there. He has earned remarkable references in The Legal 500 and Chambers & Partners. He has been a university professor of Natural Resources and Environment at the University of Argentine Social Museum for almost seven years. Since 2013, he has been head lecturer of the ‘Master of Mining Business Management’ at the Catholic University of Cuyo. Since the end of 2014, Mr Arbeleche, together with Mr Vedoya, has been in charge of the mining and environmental areas of practice at the law firm.

Youcef Belrachid Fasken Martineau DuMoulin LLP Mr Belrachid joined Fasken’s Montreal office in May 2016 as a student at law. Mr Belrachid is currently completing his articling, after which he will be a member of both the Bar of Quebec and the Law Society of Ontario. Mr Belrachid holds a Bachelor of Civil Law from the University of Montreal’s Faculty of Law, where he graduated on the Dean’s Honours List for academic excellence. Mr Belrachid also received his Juris Doctor from Osgoode Hall Law School. Prior to joining Fasken, Mr Belrachid worked as a research assistant at the University of Montreal. There, he did significant work related to contract law for renowned scholar Didier Lluelles, and contributed to the Centre de recherche en droit public under the supervision of Professor Vincent Gautrais. Mr Belrachid was also involved in the Osgoode Hall Law Journal as an associate editor, where he assessed, edited and generally contributed to the publishing process of scholarly articles.

Michael Bourassa Fasken Martineau DuMoulin LLP Michael Bourassa is a member of the global mining group at Fasken Martineau DuMoulin LLP, and acted as the group’s coordinator from 2004–2012. A recognised expert, Michael has accumulated extensive experience on both Canadian and international mining projects. Michael will remain co-chair of the International Bar Association’s (IBA) Mining Law Committee until 31 December 2018, at which time he will become a council member of the IBA’s Section on Energy, Environment, Natural Resources and Infrastructure Law. He currently serves as vice-chair of the international resource conference of the Rocky Mountain Mineral Law Foundation (RMMLF) to be held in Rio de Janeiro in April 2019. He also served as director of the RMMLF and the Prospectors & Developers Association of Canada. Widely recognised for his mining expertise, Michael has been ranked in several leading legal publications including Chambers Global, Chambers Canada and the Canadian Legal Lexpert Directory. He has also been named by Who’s Who Legal as ‘Mining Lawyer of the Year’ in 2010, 2011, 2012, 2014 and 2017, and recognised in Who’s Who Legal (com- pendium edition) for 13 consecutive years (which also recognised Fasken as the ‘Global Mining Law Firm of the Year’ in 2018 for the 10th time – the firm’s fourth consecutive win).

Sebastián Donoso Sebastián Donoso & Asociados Founding partner of Sebastián Donoso & Asociados, Sebastián Donoso is a lawyer hail- ing from the Pontifical Catholic University of Chile (1997) with a master’s in social policy from the London School of Economics and Political Science (2001). He specialises in indigenous affairs, communities and human rights, with strong expertise in natural resources and mining in particular. He has worked in both the public and private sector, been a member of the board of Chile’s National Institute on Human Rights (2013–2019), professor of indigenous law at the Pontifical Catholic University of Chile and research associate at its Center of Public Policy.

Adolfo Durañona Baker McKenzie Adolfo Durañona has extensive experience working on corporate and commercial transactions for companies in the oil and gas, mining, environmental and natural resources industries. In the oil and gas sector, he advises companies in the upstream, including those with onshore and offshore activities, operators and service companies. He is a member of the Buenos Aires Bar Association and the Rocky Mountain Mineral Law Foundation. He has also authored several reviews for various publishers – including Sweet & Maxwell – usually involving Argentinian investments and mining. Since 2013, he has been one of the managers of the Buenos Aires office. He has been ranked in Chambers & Partners as a Band 2 attorney for Argentina – Energy & Natural Resources: Mining. His practice is focused on commercial agreements and major projects, as well as mergers and acquisitions in Argentina.

Florencia Heredia Allende & Brea Florencia Heredia, partner of Allende & Brea, is an expert in mining law with more than 25 years’ extensive experience advising financing institutions and companies in complex mining and energy transactions in Argentina, having repeatedly represented lenders in all mining project finance taken place in the country. She was founder of HOLT Abogados (2008–2017), a natural resources boutique, and prior to that a member of Estudio Beccar Varela for 16 years, where she was the head of the natural resources and environmental law department for nine years. In 1997, she worked for Beiten Burkhardt Mittl & Wegener (today Beiten Burkhardt) one of the leading German law firms. For this law firm she also worked in the Moscow and St Petesbourg offices, mainly in connection to energy, natural resources and environment-related projects.

She is an active member of the International Bar Association, chair of the Mining Law Committee (2014–2015) and is currently council member of SEERIL (Section on Energy, Environment, Natural Resources and Infrastructure law). She has been – and is currently – trustee-at-large of the Rocky Mountain Mineral Law Foundation, for which she also served as secretary to the board (2014–2015), and member of the International Women’s Forum (Argentinian Chapter), among other relevant entities. She is member of the Academic Board of RADHEM in Argentina, a publication specialising in energy and natural resources. As of 2018, she is a member of the Advisory Board to the Law School of Universidad Torcuato di Tella in Buenos Aires, Argentina. She has been constantly nominated as a leading mining lawyer and star individual by Chambers & Partners, The Legal 500, etc, and has been included in the lists of main mining lawyers of the world in editions of Who’s Who Legal in the past 15 years, being recipient of the Mining Lawyer of the Year Award for 2013, 2015, 2016 and 2018, and one of the highlighted women in the Women in Law reviews.

Juan Fernando Larrea Savinovich Tobar ZVS Spingarn Juan Fernando Larrea Savinovich is a results-driven change agent with a career-long record of energy, mining and sustainable development advocacy success for leading organisations. A proven talent for navigating complex legal matters while securing organisational interests in both the private and public sector, he is a growth-focused advocate with expertise spanning energy, mining, sustainable development, corporate social responsibility, environmental law, team leadership, contract drafting and negotiations, corporate policy, financial and business transactions, cross-functional team collaboration, legal, social and political analysis, legal research, due diligence efforts and client advocacy. He is an exceptionally dedicated professional with keen interper- sonal, communication and organisational skills as well as government, public and stakeholder relations. His practice areas include natural resources, energy and infrastructure.

Jorge Alberto Ledesma García Baker McKenzie Jorge Alberto Ledesma García is a senior associate in the corporate and securities practice group of the Mexico City office of Baker McKenzie. He joined the office in 2011. Jorge has over 10 years of experience in M&A transactions, including asset and share acquisitions, mergers, demergers, spin-offs and joint ventures. Jorge also has experience in cross-border corporate reorganisations, negotiations of commercial agreements and foreign investment issues, as well as in capital market matters – mainly those related to asset securitisations. Jorge graduated from the Panamerican University Law School in Mexico City in 2007, and holds a specialisation degree in Mexican corporate and commercial law from the same university.

Andrei Liakhov Sayenko Kharenko Andrei Liakhov is a partner at Sayenko Kharenko and has over 23 years of international experience with leading law firms, private companies and government institutions in the United Kingdom, Ukraine, Russia, Lithuania and Canada. Dr Liakhov advises extensively on the most sophisticated cross-border transactions relating to corporate finance and securities, corporate governance and corporate restructuring, wealth management, debt restructuring and M&A. He has extensive experience in the public sector and has been repeatedly involved in developing legislation, negotiating international treaties and agreements, and advising on the most complex transactions involving the state. Dr Liakhov is a British lawyer qualified in Lithuania and Russia.

Luis E Lucero Marval, O’Farrell & Mairal Luis E Lucero is a partner at Marval, O’Farrell & Mairal, where he heads the mining group. He is also an expert in project finance, complex litigation, arbitration and corporate matters. With a law degree from the University of Buenos Aires in 1983, and a postgraduate course in business law from the Universidad Argentina de la Empresa, Luis has taken many more specialised courses such as the Program of Instruction for Lawyers, Harvard Law School, 1993; the Global Issues in Corporate Mining Strategy and Government Policy Progeam at the University of Dundee, 2001; and the Lex Mundi Institute Business Management Program at the University of Cambridge Judge Business School, 2014. He has led workshops at the Centre for Energy, Petroleum, Mineral Law and Policy, University of Dundee, UK, where he was appointed Honorary Lecturer in 2010–2013. He is a member of the Buenos Aires Bar Association, the International Bar Association, the American Bar Association, the Argentine Committee for Domestic and Transnational Arbitration and the World Initiative of Mining Lawyers.

Mykola Lytvynenko Sayenko Kharenko Mykola Lytvynenko is a junior associate at Sayenko Kharenko.

Frank Mariage Fasken Martineau DuMoulin LLP Mr Mariage joined Fasken’s global mining group in June 2012. Mr Mariage practises in securities, corporate and mining law. Mr Mariage mainly represents mining companies and accompanies them in the process that leads to the discovery, sale or mining of mineral deposits in Canada or abroad. He is listed in the Canadian Lexpert Directory, Chambers Canada, Best Lawyers in Canada and Who’s Who Legal for his expertise in mining law. He

188 © Law Business Research 2019 About the Authors received the designation of ‘Lawyer of the Year’ from Best Lawyers in Canada in 2017 (Natural Resources Law) and in 2018 (Mining Law). Mr Mariage served as the chair of the Quebec Mineral Exploration Association from 2014 to 2018. He also gives lectures for the TSX Venture Exchange on how to manage companies that are listed on a stock exchange.

Juan Pablo Menna Baker McKenzie Juan Pablo Menna is a partner in the tax practice group in Baker McKenzie, Buenos Aires. He has extensive experience advising clients on tax planning. He also assists and represents clients in complex tax litigation cases, particularly in connection to transfer pricing matters. He is a member of the Buenos Aires Bar Association and the Argentine Association of Fiscal Studies. He has written several articles on tax issues for numerous publications. Additionally he was a professor at Austral University. He has been nominated as leading tax lawyer (by International Tax Review – 2013, 2014, 2015 and 2016 editions). Juan Pablo advises companies with business operations in Argentina on tax matters, particularly on mergers and acquisitions, cross-border transactions and tax-free reorganisations. He helps clients develop and implement tax-efficient structures for financial transactions, acquisitions and sales of business operations, and related transactions. Particularly, he handles tax planning for oil and gas projects, mining projects and numerous industries, including telecommunications, real estate, software and pharmaceuticals.

Andrés Nieto Sánchez de Tagle Von Wobeser y Sierra, SC Partner of the banking, finance and capital markets practices, Andrés has a multi disciplinary practice, with an emphasis on cross-border transactions, which includes experience in several of the principal transactions that have taken place in Mexico and the United States in the areas of banking and finance, securities, private equity, mergers and acquisitions, and mining, as well as corporate, structured and project finance. Currently, he advises many national and foreign companies in their most important and strategic operations in Mexico and Latin America. His clients include companies and regional and multinational financial institutions based in the United States, Canada, Germany, the European Community and Asia. Additionally, he has advised clients in the development of legal strategies and solutions in relation to, among other areas, cross-border acquisitions, financial operations and bank investments, incorporation of companies and associations, workouts, restructuring and reorganisations.

Jorge Ruiz Baker McKenzie Jorge Ruiz joined Baker McKenzie in 1986. He is a principal in the Mexico City office. He currently heads the firm’s national corporate mergers and acquisitions practice group. Mr Ruiz is the commercial notary public No. 4 for the state of Chihuahua. He was an associate professor at the Monterrey Institute of Technology and Higher Education from 1986 to 1992, and associate visiting professor on its graduate programmes in 1995 and 1996. He was chair of the Economic Development Council in Ciudad Juárez from 2006 to 2008, and of the Economic Development Council for the State of Chihuahua in 2008. He was also chair of the Mexican Institute of Financial Executives. Mr Ruiz’s 32-plus- year practice focuses on M&A and corporate law. He is well versed and experienced on issues and matters related to foreign investment, banking, finance, real estate, and energy, mining and infrastructure. He has a strong background advising in the creation, development, operation and restructuring of commercial entities in various fields of industry, including the mining and automotive industry. His practice is also focused on a wide array of general commercial issues. Mr Ruiz graduated from the law school of the Monterrey Institute of Technology and Higher Education in 1985, and holds a LLM degree from Columbia Law School, Columbia University.

Adriano Drummond C Trindade Pinheiro Neto Advogados Adriano Drummond Cançado Trindade is a counsel at Brazilian law firm Pinheiro Neto Advogados, where he has devoted his time to providing advice to exploration and mining companies and investors in aspects involving mining projects. He holds an LLB from the Law School of the University of Brasilia and an LLM (Distinction) from the Centre for Energy, Petroleum, Mineral Law and Policy from the University of Dundee. Mr Trindade is also a lecturer of resources law at the University of Brasilia Law School, where he also heads the mining section of the natural resources law research group, and is a PhD candidate. He has been continually listed as a top mining lawyer by various international legal guides.

Tomás Eduardo Trusso Krause Mayol Baker McKenzie Tomás Eduardo Trusso Krause Mayol specialises in mergers and acquisitions, and corporate, mining and environmental law. He has advised local and foreign companies of different industries, as well as multinational business groups doing business in Argentina, and other jurisdictions in Latin America. He also provides specialised advice to mining companies in relation to compliance with local mining and environmental regulations, and on the corporate and industry-specific contractual matters.

Maximiliano Urrutia Carey Maximiliano Urrutia is an associate at Carey. His practice is focused on natural resources, mining and energy. He is co-author of ‘Mining in Chile: Overview’, Country Q&A, Practical Law (2014), co-author of ‘Chile: An Introduction’, Energy & Natural Resources: Mining, Chambers Latin America (2015) and co-author of ‘Regulated Industries – Mining’, Doing Business in Chile, British-Chilean Chamber of Commerce (2017). Mr Urrutia graduated from Law at the Pontifical Catholic University of Chile, and he was an exchange student at the University of Melbourne, Australia, in 2011.

Sebastián Pedro Vedoya Bruchou, Fernández Madero & Lombardi Mr Vedoya graduated from the School of Law at the Pontifical Catholic University of Argentina in 1996. He was admitted to the local Bar in 1997, and took a programme on US Business Law at the University of California in 2000. Before becoming a partner at Bruchou, he was a member for more than 16 years, together with Sergio D Arbeleche, of the natural resources and environmental departments of top-tier prestigious law firms specialised in such areas of practice (as a partner in such law firms between 2008 and 2014). He has been a university professor of natural resources and environment at the University of Argentine Social Museum for almost seven years, and a postgraduate professor at the Pontifical Catholic University of Argentina. He is a lecturer of the ‘Master of Mining Business Management’ at the Catholic University of Cuyo. He was ranked among the ‘Best Lawyers of Argentina’ by Revista Apertura (which is a magazine in Argentina recognised for its legal rankings). He is currently coordinator of the Glaciers Committee at the Argentine Chamber of Mining Entrepreneurs. He has also earned remarkable references in The Legal 500, Chambers & Partners and Who’s Who Legal. Since the end of 2014, Mr Vedoya and Mr Arbeleche have been in charge of the mining and environmental areas of practice at Bruchou.

Francisca Vergara Sebastián Donoso & Asociados An associate lawyer at Sebastián Donoso & Asociados, Francisca Vergara graduated from the Pontifical Catholic University of Chile (2009) with a postgraduate diploma in administrative law (2011), and natural resources law and water law certificates (2014) . She has a master’s degree in environmental law from the University of Melbourne (2016). She has extensive experience in private practice in Chile, specialising in indigenous affairs, communities, natural resources and water law in particular. She is a professor of indigenous law at the Pontifical Catholic University of Chile (since 2018).

Rafael Vergara Carey Rafael Vergara is partner at Carey and co-head of the firm’s natural resources and environment group. His practice focuses on natural resources, mining, water rights, energy, environment, surface lands, project financing, and corporate and commercial law. Since 1996, Mr Vergara has been professor of mining law at the University of Chile, and from 2003 at the University of Los Andes. He has been recognised as a leading lawyer in mining and the environment by several international publications such as Chambers & Partners, Who’s Who Legal, The Legal 500 and Latin Lawyer. Mr Vergara graduated from Law at the University of Chile.

Carlos Vilhena Pinheiro Neto Advogados Carlos Vilhena is a partner at Brazilian law firm Pinheiro Neto Advogados. He is in charge of the firm’s mining practice and governmental relations. Mr Vilhena has an LLB from the Law School of the University of Brasilia and an LLM from the Centre for Energy, Petroleum, Mineral Law and Policy from the University of Dundee. He is a member of the section on Energy, Environment, Natural Resources and Infrastructure Law of the International Bar Association. In his mining practice, he has advised exploration and mining companies, as well as investors, on a wide array of mining-related issues. He has been continually listed as a top mining lawyer by various international legal guides.

César Zumárraga Tobar ZVS Spingarn César Zumárraga is a partner at Tobar ZVS Spingarn and head of the Natural Resources, Energy and Infrastructure Unit. He has a wide range of experience in national and international transactions, principally focusing on the energy, natural resources and infrastructure industries. Mr Zumárraga is a member of the International Bar Association, the Rocky Mountain Mineral Law Foundation and the Prospector and Developers Association of Canada. Owing to his work, Mr Zumárraga has been consistently ranked by publications such as Latin Lawyer, Who’s Who Legal: Mining, Chambers Global and Chambers Latin America, which emphasise: ‘The “spectacular” César Zumárraga is endorsed by market commen- tators for his experience in the mining field. They comment that “he has a solid knowledge and looks for solutions.” Sources confirm that “he's intelligent”, adding: “He has strong analytical skills.”’ Who’s Who Legal says: ‘César Zumárraga is one of Ecuador’s most respected mining lawyers. He is highly knowledgeable about the market and has a commercial out- look when advising clients.’ He is author of the Ecuador chapter in Getting the Deal Through: Mining.

The Legal 500 states: ‘Terralex alliance member-firm Tobar ZVS Spingarn’s practice is often instructed by foreign clients on major regulatory and corporate transactions and is highly rated for its “deep experience in mining” Mr Zumárraga acted as the Executive Assistant of the State Attorney General from 1992 to 1996. Mr Zumárraga is also an arbitrator of the Arbitration Centre of the Quito Chamber of Commerce. His practice areas include natural resources, energy and infrastructure.

Contact Details

Allende & Brea Cecilia Grierson 255 Maipú 1300 6th Floor 11th Floor C1107CPE Buenos Aires C1006ACT Buenos Aires Argentina Argentina Tel: +54 11 4310 2200 Tel: +54 11 4318 9968 Fax: +54 11 4310 2299 Fax: +54 11 4318 9999 [email protected] [email protected] [email protected] [email protected] [email protected] www.allendebrea.com.ar [email protected]

www.bakermckenzie.com Baker McKenzie Edificio Virreyes Pedregal 24, 12th Floor Bruchou, Fernández Madero & Lomas Virreyes / Col. Molino del Rey Lombardi Mexico City, 11040 Ing. Enrique Butty 275 Mexico 12th Floor Tel: +52 55 5279 2900 / 5351 4110 C1001AFA Buenos Aires Fax: +52 55 5279 2999 Argentina [email protected] Tel: +54 11 4021 2300 [email protected] Fax: +54 11 4021 2301 [email protected] [email protected] www.bruchou.com

Carey Bay Adelaide Centre Isidora Goyenechea 2800 333 Bay Street, Suite 2400 43rd Floor PO Box 20 Las Condes Toronto, ON Santiago M5H 2T6 Chile Canada Tel: +56 2 2928 2200 Tel: +1 416 865 5455 Fax: +56 2 2928 2228 Fax: +1 416 364 7813 [email protected] [email protected] [email protected] www.carey.cl www.fasken.com

Dentons LLP Marvel, O’Farrell & Mairal 250 Howe Street Av Leandro Alem 882 20th Floor C1001AAQ Buenos Aires Vancouver, British Columbia V6C 3R8 Argentina Canada Tel: +54 11 4310 0240 Tel: +1 604 443 7134 Fax: +54 11 4320 0200 Fax: +1 604 683 5214 [email protected] [email protected] www.marval.com www.dentons.com

Pinheiro Neto Advogados Fasken Martineau DuMoulin LLP SAFS, Quadra 2, Bloco B 800 Victoria Square, Suite 3700 Ed Via Office, 3rd Floor PO Box 242 70070-600 Brasilia Montreal, QC Brazil H4Z 1E9 Tel: +55 61 3312 9400 Canada Fax: +55 61 3312 9444 Tel: +1 514 397 7400 [email protected] Fax: +1 514 397 7600 [email protected] [email protected] www.pinheironeto.com.br [email protected]

Sayenko Kharenko Tobar ZVS Spingarn 10 Muzeyny Provulok Avenida 12 de Octubre N26-97 y Abraham Kiev 01001 Lincoln Torre 1492 Ukraine Office 1505 Tel: +380 44 499 6000 / 389 5000 Quito Fax: +380 44 499 6250 Ecuador [email protected] Tel: +593 2 29 86 456 www.sk.ua [email protected] [email protected] www.tzvs.ec Sebastián Donoso & Asociados Cerro El Plomo 5931 Oficina 1714 Von Wobeser y Sierra, SC Las Condes Paseo de los Tamarindos 60 Santiago 4th Floor Chile Bosques de las Lomas Tel: +56 2 2769 9006 Cuajimalpa de Morelos [email protected] Mexico City, 05120 www.sdyasociados.cl Mexico Tel: +52 55 5258 1000 [email protected] www.vonwobeserysierra.com

Written from diverse jurisdictional viewpoints by leading industry practitioners, this Practice Guide – published by Getting the Deal Through – examines key themes topical to the international mining community. Featuring detailed analysis and guidance on navigating critical issues facing commercial mining ventures worldwide, this Guide provides essential reading for lawyers, financiers, mining companies, advisory firms, consultants and contractors. Subjects covered include project financing; commercial agreements; anti-corruption; battery minerals; glacier protection; community engagement; sanctions; and mining closure.

Practice Guides ISBN 978-1-78915-124-4