Roundtable: Mining 2012
The International Who’s Who of Mining Lawyers has brought together two of the leading practitioners in the world to discuss key issues facing lawyers today.
Participants
Luis Carlos Rodrigo Prado
Rodrigo Elías & Medrano Abogados
Peru
Shearman & Sterling LLP
New York
PROJECT FINANCING
Who’s Who Legal: Which are the stock exchanges to watch in the New Year? Sources remarked on the liquidity and accessibility of Asian stock exchanges and others identified a move away from established markets such as AIM. Are the traditional arenas of financing still viable as the first choice?
Luis Carlos Rodrigo Prado: It is clear that most companies are trying to think out of the box and resorting to less common stock exchanges is part of that, but my personal view is that those exchanges where mining has a track record and is more familiar for investors, such as the TSX or the Australian exchanges, will remain as the most sought alternatives, specially for junior companies. Having said this, Asian exchanges in general (Singapore, Hong Kong, etc.) undoubtedly are very attractive right now because of their liquidity.
Cynthia Urda Kassis: It is certainly the case that there has been much attention paid recently to the emergence of the Asian exchanges as listing venues for mining companies. The potential increase in listings in Asia (particularly dual listings) is a real phenomenon, and I would expect it to continue and to grow as long as there is either some valuation benefit associated with listing in Asia or such listings provide access to otherwise untapped capital raising capacity.
Hong Kong, in particular, is interesting and I have now read several times the prediction that it will soon be among the largest centres for raising funds for the international mining sector. That said there are still growth pains to be worked through when listing in Hong Kong, including the costs associated with such listings, but those are likely to naturally sort out as the number of companies listed grows. Thus far, it seems the actual number of mining companies listed is still limited and companies with expansion plans geared towards the Asia region or other existing connections in the region have found listing in Hong Kong most beneficial. No doubt the limited number is also at least in part a function of the lead time needed to complete a listing.
Though the Asian exchanges are attracting much of the attention, the traditional exchanges remain vital and are likely to continue to be so. London continues to be an attractive venue for mining companies particularly large cap companies and companies from the emerging markets such as Africa as the market appears to be very receptive to these companies. The TSX remains a hugely important venue, particularly for junior mining companies. It has been reported that 60 per cent of the world’s public mining companies are listed on one of the exchanges in Canada. Finally, we are seeing a resurgence of the US exchanges as a listing venue for non-US companies. Though listing in the US continues to be a daunting prospect for many, with all the recent turmoil in global markets, some companies are attracted to the US markets because of their relative stability and deep pools of capital. In addition, we sense that there is less consternation on the part of issuers regarding the regulatory burden of having a US listing.
EMERGING AND SUSTAINABLE MARKETS
Who’s Who Legal: How is your firm responding to the expansion of mining opportunities and interest in emerging markets such as West and Central Africa? How does your firm help clients ensure these regions are accessible to international investment while meeting local customs and regulations?
Luis Carlos Rodrigo Prado: Being a South American firm, what we are trying to do is consolidate closer relations with firms that operate in those markets, and especially with a view to work together when clients that already operate in those countries or regions, seek opportunities in our region. However, our scope of activities is certainly focused in South America and of course, especially, Peru.
Cynthia Urda Kassis: The significant increase in mining development activity in Africa over the past several years has certainly not gone unnoticed by us. The breadth of activity across the continent in terms of the number of jurisdictions and the different commodities involved, not to mention the related power, transport and port infrastructure projects, is impressive. We have traditionally been quite active in the region - with mining-focused lawyers in New York, Toronto, London and Asia and over 50 years of experience advising on Africa-related matters but given this substantial increase in activity, we decided to enhance our resources to ensure our ability to offer our clients the full legal support we anticipate they will require.
We bolstered our resources with the addition of Christophe Asselineau and his team in our Paris office. Christophe has over 20 years of experience in the African market, having advised on major mining and infrastructure projects in more than 20 countries across North and Sub-Saharan Africa, including copper, cobalt, zinc, diamond, uranium, iron ore and rare earths projects. Christophe, who is recognised as a leading mining lawyer in The International Who’s Who of Mining Lawyers, and his team are also expert in the OHADA laws so can advise on the laws of the 16 countries that have ratified the OHADA Treaty.
IMPACT OF CHANGES
Who’s Who Legal: The mining world saw numerous developments in regulation and legislation, particularly concerning contract procurement, royalties’ schemes and environmental/indigenous protections. How have your clients dealt with changes in your jurisdiction? Have the changes encouraged or discouraged foreign interest?
Luis Carlos Rodrigo Prado: Peru certainly is one of those countries whose mining activities are booming and, due to this, the country and the population have been demanding a higher contribution from mining companies (although most of them were already performing very successful CSR programmes and contributing a lot). Based on this, the recently elected government lead by Mr Ollanta Humala, was determined to increase the royalties and taxes applicable to the mining industry. Fortunately, after he took office, the approach of his government, led by Prime Minister Salomon Lerner, was conciliatory and they met with the mining companies and jointly engaged in a technical analysis of the best way to increase the government take but based on reasonable grounds. After a two month smooth “negotiation”, the Executive submitted to Congress three bills (aiming at amending the royalty, so that it is now based on operational profits instead of on net sales, which was very important for mining companies, creating a new special tax on mining with incremental rates based on the margin of operational profit of the companies and a new agreement that could be executed by companies with stability agreements in place). These laws were rapidly passed by Congress with a sensible majority and the consent of the mining industry, which understood that with the current high prices, a bigger contribution was sensible, but not when prices may be not so good. In general, the result has been a structure by which all companies have agreed to contribute more (even those with stability agreements), accepting an increase that takes the total tax, royalty and other burdens up to approximately 43 per cent of the operational profits of the companies, which keeps Peru in a reasonably competitive zone. In short, the most important thing is that the change was “negotiated” with the industry, respected the rule of law and the stability agreements and resulted in a reasonable increase. This has kept the flow of investment in mining at very high rates, creating a foreseeable investment of around US$50 billion for the next five years.
Cynthia Urda Kassis: The economic and political events of the past 12-36 months have certainly increased investment risks in the international mining sector. The value and visibility of natural resource projects generally, and the patrimonial nature of these kinds of assets, make them natural political targets in this atmosphere. When the current economic distress is coupled with strong commodity prices the risk of resource nationalism is further heightened. Thus, we see a range of actions being taken by governments from renegotiation/increase in royalties and taxes, to imposition/increase of restrictions on foreign participation in the sector, to mandated in-country processing or governmental/local participation to repatriation of export proceeds to old fashioned expropriation. These actions have been taken in jurisdictions where such risks were anticipated, but are not limited to such jurisdictions. Some “old faithful” jurisdictions have taken such actions as well - disappointing but not yet alienating investors. To date, for the most part, though such actions have been clearly unwelcome, they have been resolved through largely collaborative negotiation and investment has continued, though in some cases at reduced levels.
HOT AREAS
Who’s Who Legal: What is the “next big” thing in mining? Which countries and raw materials are proving popular?
Luis Carlos Rodrigo Prado: The current big thing in mining is technology (robotics, etc.) and how this is turning, otherwise unfeasible projects into economically and technically viable operations. Right now, Peru, Colombia, Brazil and Chile are very attractive destinations for mining investment. Likewise, I believe that Africa continues to be very attractive but due to the political uncertainty, it has not been able to display all its importance.
Cynthia Urda Kassis: There are potentially multiple “next big things” and several countries likely to be at the forefront of popularity.
“Next big things” include the continued shake out at the intermediate level as companies seek to attain scale to push forward massive projects and as majors look to replenish their reserves. The later also has resulted in a steady stream of M&A and joint venture transactions over the past year.
It also includes the focus on rare earths and the need to find some balance in the sources of the world’s supply to prevent real or perceived market manipulation.
Finally, it includes the need in many cases to resolve incredible gaps in available supporting infrastructure (ie, ports, roads, water and power) if a number of the mega-discoveries are to proceed to development projects. Solving those gaps will likely determine which countries are to be the winners in the foreign investment popularity contest.
Clearly one key jurisdiction is Mongolia (already being described as the new Chile), various African countries (in particular Burkina Faso) and of course the old stand-bys in Latin America as well as Australia and Canada, which will continue to be at the top of the charts in terms of being favoured investment destinations.
Whatever the future brings, it seems clear that what is happening in China will be a key driver.
COMMODITY PRICES
Who’s Who Legal: As global base metal prices continue to fall but Gold prices remain high, lawyers fear that the deficient in supply of some key metals will undermine growth in extraction and trade. How is the price volatility affecting M&A activity in your jurisdiction this year and in the coming year?
Luis Carlos Rodrigo Prado: Prices are very unstable and with the risk of the international crisis becoming deeper, it is difficult to foresee a clear trend. However, my view is that M&A activity will continue to be very high. In Peru we are seeing a lot of acquisitions from Chinese and Korean companies, but also several purchases of juniors by bigger Canadian and Australian companies. In general, we see the appetite for companies and their projects growing and growing.
Cynthia Urda Kassis: As noted above, M&A activity has been strong this year and that is likely to continue in the near term for the reasons indicated as well as in reaction to price volatility, which always creates opportunities, often arising from distressed situations. Price volatility also makes it more challenging to raise capital for development, again sometimes forcing companies into unwanted marriages to ensure development.