Many of these risks are difficult to predict and must be covered comprehensively in treaty or contractual negotiations between mining investors and host nations (or between private parties, in the case of commercial contracts or offtake agreements). This is especially the case in mining, among other sectors, because the capital-intensive nature of the business often requires large expenditures long before a mine starts producing, leaving mining companies at risk of losing investments already sunk into a venture if the deal later turns sour.
As such, many treaty agreements include stabilisation clauses to mitigate this uncertainty by, for example, freezing a regulatory framework for a project so the rules in place at the time of the contract’s signing will continue to apply, or allowing for contract renegotiation if new regulations are introduced.
Nevertheless, disputes of various kinds are still regular occurrences in the complex business of mining, and the resource sector has been a prominent and growing user of international arbitration processes to resolve transnational disagreements. Leading international arbitration institutions include the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC).
Arbitration has proven popular among miners as a last resort because of its relative flexibility as a means of dispute resolution with a binding outcome, and the legal recognition of awards from these cases in the courts of most countries around the world.
“No other dispute resolution process can offer anything close to this level of coverage or portability of outcome,” wrote Sam Luttrell and Amanda Murphy of global law firm Clifford Chance in The Guide to Mining Arbitrations, published in June 2019 by Global Arbitration Review. “An international arbitration clause therefore gives a cross-border contract ‘teeth’ in a way no other clause can.”
But what are the leading issues that cause parties to seek resolution through international arbitration?
Political risk: resource nationalism and expropriation
While regulatory or political disputes can crop up in a range of contexts, for the mining sector these risks often stem from the concept of ‘resource nationalism’, or the trend for certain resource-rich developing countries to renege on treaty obligations or even expropriate private mining projects if the government deems that an insufficient share of a project’s benefits are being shared with the state or local populations.
Examples of arbitral awards based on allegedly unlawful expropriation of mining assets include a case between Khan Resources and Mongolia, which concluded in 2015 and ordered the government to pay the company $80m after the country’s Nuclear Energy Agency invalidated the licenses for a uranium exploration and production project in the province of Dornod.
Stand-offs over social and environmental concerns
The report calculated that “Colombia currently faces over $18bn dollars in threatened or pending suits, especially related to protecting indigenous territory and fragile páramo ecosystems, which provide water to over a million people”, while Mexico and Uruguay each had more than $3bn in suits related to environmental regulations.
Financial risk: offtake agreements and asset valuation
But in disputes and when establishing compensation for either party, assessing the economic potential of a producing or non-producing mine project is an important task. Discounted cash flow methods may work well for mines that already have an income, but before production has started, other assessments based on sunk costs or even future earning potential may be useful.
Source: mine.nridigital