Research Trends and Conclusions: Mining 2010
Tom Barnes -
Tom Barnes identifies the issues currently faced by leading mining lawyers.
The price of gold has never been higher. In October 2009 it reached US$1,068.30 a troy ounce, the culmination of a sustained rise. With similar patterns emerging in some other metals, one might assume that the mining industry is in rude health and that its lawyers are overwhelmed with work. However, taken over a longer period, the price of gold tells a more complex tale.
MARKET DEVELOPMENTS
At the beginning of 2007 – when the last edition of this book was published – the price of gold hovered around the US$600 mark. A year later it had reached US$1,000 before dropping to US$700 in a matter of months. Since then it has climbed again as the myriad influences of global economic upheaval are felt. The figures for copper are even more volatile – the price dropped nearly 54 per cent in 2008 followed by a rise of almost 95 per cent thus far in 2009. This volatility has taken its toll on the industry, making it extremely difficult to plan for the future, and has an unavoidable knock-on effect for its leading legal experts.
Junior and mid-market mining companies have been hit significantly by the worldwide lack of available finance, and our sources reported a virtual absence of deals in the early part of this year. The financial crisis scuppered many deals, one lawyer reported a mining client that had to abandon a transaction at the last minute as the parties were unable to be sure that the banks involved could honour their commitments. This has left some clients in significant difficulty and looking to sell assets, but while this may produce certain amounts of work for their lawyers it is hardly a positive prospect in the longer term.
As we move further into 2009 some activity is returning to the market. There are bargains to be had for those with money to spend. Lawyers are working on strategic investments in the form of debt and equity placements, although mergers and takeovers have yet to return to any great extent. Rumours continue to circulate around Rio Tinto, which agreed an alliance with BHP Billiton in June 2009. This came hot on the heels of the collapse of a prospective US$19.5 billion deal with Chinalco, China’s state-owned metals group. Projects in this sector have long lead times so some of those which were put together before the crisis have continued, although many have been stopped by cautious banks. On the other side of the coin, the current difficulties in financing projects will mean that the effects of the current crisis will drag on as the levels of exploration are likely to remain depressed for some time, delaying the sector’s ultimate recovery.
Many of our sources suggested that there is an ongoing trend towards consolidation, with some majors in a position to take over smaller players and their distressed assets, as well as reports of junior companies themselves combining. Alongside this, lawyers are seeing an increase in disputes, which is typical in hard times, and continuing levels of environment law work.
Looking to the future, some see the consolidation continuing with the ultimate result of the majors becoming even better placed. Others suggested the possibility of another downturn before a return to longer-term prosperity.
COMMODITY PRICES
As the price of natural resources rises, previous borderline projects once again become viable and then attractive. Price drops have a correspondingly damaging effect on the industry. The recent fluctuations have been unusually dramatic, in part because the increases had been driven by speculators, whose exit from the markets caused them to fall more precipitously.
Looking ahead, some factors should continue to fuel price increases. Fear of US inflation and the weakness of the dollar continue to make gold an attractive proposition. Stimulus money continues to be spent. A ‘demand crunch’ is predicted in the medium term as a result of many existing projects being shut down, and in the long term there is no escaping that global demand will outstrip supply.
However, the current record highs are an over-correction, in the view of many – they dropped too far and now have risen too high in response. Several experts have suggested that longer term prices in many metals markets will plateau or fall back, if only because the current sharp increases cannot be sustainable indefinitely. The economies of Europe and the US in particular are unable to sustain high levels of infrastructure investment at the moment.
Overall, gold has not suffered as much as base metals. If a metal is predominantly used in industry then demand will have fallen significantly in recent times, but if it is also used as a speculative, or even defensive, investment the consensus is that there remains room for prices to increase. However, there is one further key element that is driving a large proportion of the demand in all metals markets, and no one knows how long it is set to continue.
CHINA
The majority of the lawyers we spoke to worldwide reported that their current work originated from China, either directly or indirectly. The effect of the country’s prolonged programme of investment can be seen in the rises in commodity prices, but uncertainty surrounds the future, with opinion split over whether improvements in China’s local economy will lead to further investment, or whether the authorities are taking advantage of depressed prices to restock their reserves in resources such as iron ore, a tactical aim that may now have been realised.
But there are reasons to remain bullish. China Investment Corporation (CIC), China’s sovereign-wealth fund, has US$200 billion at its disposal for foreign investment. Yanzhou Coal Mining, China’s fourth-biggest coal producer, recently agreed to buy Australia’s Felix Resources for approximately US$2.9 billion, part of at least US$12.6 billion spent by Chinese energy and resources companies on overseas assets since December.
Compared with other countries, China’s production levels are low and as domestic demand increases; it needs to look abroad. The current levels of its natural resources and local infrastructure mean that it is more cost-efficient to import resources, and this is what has happened; China bought 44 per cent of Australia’s mineral exports last year. Lawyers also reported working on Chinese deals in mineral rich countries in the CIS, Africa and elsewhere. Sources noted that Chinese firms either invest to help a smaller company develop and then acquire it, or simply buy it outright. These deals can face strong resistance from some shareholders and also attract comment from regulators and politicians, including concerns that Beijing would exercise too much influence over the future production of local commodities. Traditionally, CIC at least has been keen to allay these concerns by not taking seats on the boards of acquired companies, although this may change. In the West, many hope the door will swing both ways and that a relationship with CIC will provide a gateway into the rich potential of the Chinese market.
These deals throw up other legal considerations. Chinese competition rules are beginning to become a factor in deals such as the BHP/Rio Tinto agreement, and operating in the country is not always entirely risk-free, as demonstrated by the four employees of Rio Tinto who were recently charged with bribery by Chinese police.
Chinese companies are hugely attractive to law firms, but gaining their custom and working with them efficiently brings its own challenges. In the words of one source, “You have to be unbelievably patient to deal with them and look at it long term.” Some noted a tendency for Chinese clients to avoid retaining lawyers until a deal has been absolutely agreed, meaning that lawyers are never sure if there is a realistic possibility of work until it becomes concrete. Usual negotiation techniques can prove counter-productive, and prospective deals require bureaucratic approval and can be blocked at any stage. The language barrier remains problematic on both sides. However, the trend is established. One lawyer sums up his experience: “Five years ago we didn’t have a single Chinese client, now I have several and go to China once a quarter.”
CENTRES OF KNOWLEDGE
The question of the best way to serve clients in this sector is a complicated one. It is a quirk of resources law, as opposed to other commercial practice areas that many countries with the highest levels of natural resources do not have highly sophisticated legal markets.
Canada, Australia, South Africa and the US are the exceptions, and as such, law firms from these locations have plenty of exportable experience and a track record in this type of work.
Most specialists in these countries are securities lawyers as well as mining experts, so are able to handle all aspects of their clients’ work. While larger mining companies will handle much of the ‘nuts and bolts’ in house, such as mining agreements, smaller companies outsource all their legal work. Mining lawyers see more M&A work when times are tough and there is consolidation in the market, and more financing work when things pick up. Toronto is established as a global capital-raising sector, with US and international clients looking to Canadian law firms to arrange the financing of their projects worldwide, either in Toronto or on AIM in London. The aforementioned countries also benefit from having established industries with a large amount of professionals, not just lawyers, focused on mining. The other traditional leading legal markets of the US and Europe will have highly skilled corporate and finance lawyers who act for mining clients, but few have the opportunity to accrue the range and depth of experience in ‘dirt law’, native-title issues and compliance work that their counterparts do.
Current economic conditions have limited the scope for these firms to increase their reach and status to any great degree recently, and there has not been much movement at the top table for a while. Boutique firms continue to find their niche, as clients demand high quality, partner-led work on the fewer deals that are being done. However, one factor remains paramount. In the words of one leading figure: “In mining, you absolutely need the network.”
INTERNATIONAL REQUIREMENTS
As the majority of the projects a ‘pure’ mining lawyer will work on are based outside their home jurisdictions, often in countries that have only recently opened up to international investment, law firms rely on their local contacts to ensure that their service to clients remains at the requisite high standard. As such, reliable local or regional contacts are paramount, and firms are moving to ensure they have access to such advice. One example is Norton Rose’s forthcoming merger with Deacons Australia, in part because of the latter’s strong mining practice and Asia-Pacific connections, particularly to China.
Local regulations define the viability of a project, and vary greatly. Uncertainty continues regarding mining laws in the US, where industry is concerned about some existing and proposed provisions, and regulatory changes in this sector are also pending in Ontario. Elsewhere, investors have to balance the risks involved in doing business in emerging countries with the potential rewards. Lawyers are called on to help clients with a mind-bogglingly diverse range of matters from capital raising and mining agreements, to the protection of employees from local prosecution and even liaising with governments regarding military access to mine infrastructure to fight rebel forces.
Looking to the future, Latin America was repeatedly cited as a potentially lucrative market with Colombia in particular singled out – “It’s the next Venezuela, only more politically stable.” Hong Kong is spoken of as a future alternative to AIM for listings, while Africa and Eastern Europe continue to be the subject of covetous glances.
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This sector is unusual among the practice areas covered by Who’s Who Legal. The work often centres on countries that we rarely investigate in other practice areas, and the breadth of experience required of the top individuals is perhaps wider here than anywhere else. The traditional centres of international law are under-represented, with the greatest expertise to be found elsewhere. While the sector is by no means immune to the effects of the global economy’s ongoing difficulties, lawyers who are able to provide flexible, practical advice and reliable local knowledge will continue to find themselves in demand.