This article was featured in our 2023 Mining Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Mundi and Jus Connect.
This issue explores the mining industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of February 2023. Discover updated insights into mining arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on mining projects, disputes, & arbitration from leading lawyers, arbitrators, experts, and in-house counsel.
THE AUTHOR:
Bianca Depres, Senior Legal Counsel at Resolute Mining
In a decade-long commodity downturn cycle, miners have been faced with price volatility, a high level of economic uncertainty, growth of resource nationalism, and rising production costs. Under these circumstances, numerous mining companies have been driven to find alternative sources of financing. While traditional funding, such as debt and equity raising, was hardly accessible or simply unavailable to junior or midsize miners, alternative financing mechanisms have been flourishing. In particular, streaming agreements have been gaining in popularity and are increasingly relied upon. Before, however, relying on such agreements, it is important and useful to explain a few concepts below.
Streaming Agreements in Practice
Under a typical streaming agreement, a mining company agrees to sell a portion of its future mining production (either based on a specified amount or an agreed percentage) in exchange for an upfront payment or by a series of instalments at a significantly discounted purchase price over a long period of time (i.e., several decades) or for the life of the mine. Generally, the streamed metal will be a noncore or a by-product of the mining production, which makes it attractive for mining companies to enter into such an agreement. For example, a streaming agreement may provide for a buyer to acquire the right to purchase 50% of the silver produced as a by-product of gold production for the life of the mine. In exchange, such upfront payment provides cashflow and funds for the development of the project. In practice, the streaming agreement may provide for the delivery of actual metal (i.e., gold bars) or, as in most cases, credit to the buyer’s metal account on metals markets such as the London Metal Exchange or the ABX Global in Australia.
Such arrangements can be tailored to the uniqueness of each project and the parties’ interests.
Drafting Tips
While there is an underline structure common to all streaming agreements, it is important to keep in mind the uniqueness and complexity of each project and reflect such reality in the drafting of the agreement.
Pricing- Adjustment Mechanism
In terms of risks involved, there is an important balance to strike between the miner and the buyer. After the miner and buyer have entered into a streaming agreement, there will inevitably be some changes to the general economic, financial, and commercial conditions, especially when the stream is for the life of the mine. The miner may therefore want to protect its interest against any commodity price fluctuations and insert a price adjustment mechanism in the streaming agreement. A price adjustment clause can be used to ensure that the commodity prices reflect market conditions. There can be a myriad of ways to provide for an adjustment clause such as providing for commodity prices to be adjusted against a consumer price index or a market index, depending on the jurisdiction. Ultimately, the choice of the adjustment mechanism will be a commercial decision, but parties should avoid reverting to a complex formula.
When it comes to price fluctuations, generally, a streaming agreement would also include a buyback clause or the possibility of revisiting the agreed price, especially when the stream is for the life of the mine. The parties may also want to include a right for the miner to buy back part of the streamed metal within a specified timeframe, following commencement of the metal’s deliveries.
From a buyer’s perspective, streaming agreements allow to secure long term delivery of metals (physical or metal credits) below market price without assuming operational costs and limiting the risks associated with the project. The risk (i.e., production, political, economic, etc.) the buyer would be willing to accept, will be reflected in the price of the streamed commodity. The price agreed will entail a fixed price that is lower than the market price at payment.
Security Interests
In practice, the right of the buyer to purchase a portion of the future production may be secured or unsecured. That said, as a protection mechanism, the buyer would generally require a security interest. The security can take many forms, but at a minimum, it must provide some comfort. The jurisdiction in which the miner operates may affect the type of security favoured. In some jurisdictions the preferred security is a mortgage over tenements or over the facilities that produce the minerals or pledge over the produced minerals. When the rights are secured, the buyer will generally require a first charge security interest, but if this is the case, the streaming agreement should contemplate additional financing requirements. Given the nature of the streaming agreement, as alternative financing method, there will most likely be a need for the min- er to raise additional financing (i.e., debt or equity).
In such context, the new lender will anticipate taking priority in the ranking of charges, more specifically when a debt facility is involved. The buyer would be expected in such a scenario to subordinate its interest and an intercreditor agreement should be entered into to regulate the interests and rights of the various lender and financing providers. The intercreditor agreement will also elaborate on how those secured creditors may exercise and enforce their rights. Allowing for additional financing and some flexibility when it comes to ranking in the streaming agreement will ensure the bankability of the project.
Representations and Warranties
Streaming agreements will also contain the general representations and warranties. Each party will represent that it is in good standing, has complied with all required corporate acts and has the power to enter into the streaming agreement. In addition, the parties should represent that entering into such agreement will not violate any other arrangements or obligations it is bound to or contravene any local laws. Furthermore, the buyer may require the miner to provide some comfort around its obligation to keep the tenement in due care and confirm that no other entity has the right or option to acquire the mining property or streamed minerals. The streaming agreement will generally contain an indemnification clause in favour of the other party in case of misrepresentation or breach of a warranty.
Assignment and Change of Control
The buyer may also request additional security from the miner and include a restriction against change of control in the streaming agreement. In such case, a change of control clause would require that the streaming agreement will continue in full force and effect despite the change of control. Both parties may also subject the assignment of their rights and obligations in the streaming agreement to a prior written consent from the other party.
When Dispute is Unavoidable
In most cases, streaming agreements are entered into by two non-domiciled entities, typically operating in emerging markets. As such, any streaming agreements should contain a governing law clause as well
as some form of dispute resolution mechanism. Regarding the former, it is recommended that the parties choose a law that both parties are familiar with and which enables them to resolve their eventual dispute
in a balanced manner. Regarding the latter, if arbitration is chosen as the forum for dispute resolution, it is recommended to break down the dispute between legal and technical aspects (i.e., specification or quality of the streamed commodity or the application of a pricing formula). Legal disputes will generally be resolved by a panel of three arbitrators, whereas technical disputes will involve an expert determination. The arbitration clause should also allow the parties to choose a neutral seat to resolve disputes and to provide safeguards that may not be available in domestic courts.
ABOUT THE AUTHOR:
Bianca Depres is the senior legal counsel at Resolute Mining in London. Originally from Montreal, Bianca started her career with global law firms practicing in the mining sector. She is the founder of the Montreal chapter of Young Mining Professionals (YMP) and currently leading the London chapter. She sits on the global board of YMP and on the event committee of Women in Mining UK. She is also actively involved in the World Association of Mining Lawyers (WAOML).
Find more data-backed insights in our 2023 Mining Arbitration Report
