Legal minefield - due diligence for mining companies

Materials World magazine
1 Jul 2010

Mining companies that are expanding operations to different countries must ensure they have the correct legal guidance suitable for the location. Andrew Wright, Head of Public Markets for law firm Cobbetts LLP, outlines the issues.

By its nature, exploration and mining takes companies to many parts of the world and into countries with developing legal systems and unstable political regimes. While this can prove extremely lucrative for successful companies and their shareholders, getting the legal due diligence wrong can inflict irreparable damage on a company.

A common mistake by many companies is to let their own advisers draft contracts conferring right over exploration or mining titles without the advice of local lawyers.  

Local knowledge

Complying with and fulfilling the requirements of local corporate and mining law is essential, but it can be extremely difficult to do so when these may be subject to wholesale and unexpected change. Even some of the most experienced and respected British, Canadian and Australian lawyers have found themselves caught out and their clients severely disadvantaged when legislation has been implemented, removed or given a different interpretation by an unstable political regime.  

And, inevitably, the invalidity of any licence or permit will only come to light after the high risk exploration stage – where a mining permit or exploration licence is up for renewal – when a potential acquirer takes an interest in the operation, or when the financing bank’s lawyers take a close look at the paperwork before a funding decision is made.

Mining and exploration companies need to think carefully about their legal strategy in order to ensure they are not left with permits and licences that are open to attack, or at the mercy of local companies or a government that wishes to claim ownership of a successful exploration project. All documentation should be run past local lawyers and the company’s own in-house advisers.

The problem in many developing countries is that not all lawyers are equal in terms of expertise or in terms of reliability, as many of them will not have the necessary experience to understand the requirements and standards demanded by international mining and exploration companies. The company’s trusted legal advisers should be responsible for finding an appropriate local firm that has the necessary experience and reputation, and a bonus would be a working relationship with the appropriate governmental departments.

Once instructions have been given to the local firm, in-house legal advisers must take a keen interest to assess whether the advice given is up to the standards required. The reports may not be detailed enough and might lead to supplementary questions. The importance of the relationship between the company’s advisers and the local lawyers cannot be emphasised enough.

Location, location, location

Another problem for companies considering a floatation, is which jurisdiction to choose and why. An example of the care and consideration that is needed has been highlighted by the present economic
climate, which has seen the rise of activism among shareholders. Although always present, shareholder activism has increased and in some cases is used as a back door mechanism for taking control of the company. This means that when selecting jurisdiction for a new company, always be sure that the company has protection from that jurisdiction’s takeover legislation or codes. Although it may be beneficial to set up in an exotic jurisdiction for tax reasons, there may be other reasons why it might not be suitable. One reason could be that there is no formal takeover code, and another could be that any investment institutions are unhappy with the particular jurisdiction.

Setting up a UK public company may have its problems in that the Takeover Panel in the UK may view that an AIM quoted company does not fall under the jurisdiction of the Panel if the main interests of the company lies in a different jurisdiction.

These issues are complex and mean that having a team of advisers, both at home and in overseas operational bases, who work as a close co-ordinated body, is essential.

There are a myriad of problems that face mining and exploration companies operating in developing countries. Firms need strong legal teams who have the trust of each other and the board of the company, to educate local lawyers in the requirements of international bourses and meeting the rigorous demands of banks when borrowing money for project finance.

Further information

Cobbetts LLP, 70 Gray's Inn Road, London, WC1X 8BT, UK. Tel: +44 (0)845 404 2404. E-mail: Website: