CASE STUDY OF A HYPOTHETICAL MINING PROJECT - VENEZUELAN KEY ASPECTS
| Jurisdiction | Derecho Internacional |
(Apr 2005)
CASE STUDY OF A HYPOTHETICAL MINING PROJECT - VENEZUELAN KEY ASPECTS
Macleod Dixon S.C.
Caracas, Venezuela
Jorge A. Neher is a partner in the law firm of Macleod Dixon in Caracas, Venezuela and his practice areas include mining law, electricity law, oil and gas, environmental law, foreign investments, administrative law and international commercial law. Mr. Neher's mining practice is the largest in Venezuela. It includes advice to major and junior mining companies on acquisitions, joint-ventures, corporate and project finance, regulatory and environmental matters, development of projects of precious and base metals, precious stones, industrial minerals, coal, etc. He has also structured mining transactions in several countries in Latin America.
Mr. Neher has been a professor of administrative law at the Universidad Catolica Andres Bello in Caracas and a visiting professor at the Universidad Central de Venezuela in Caracas and has served as alternate Judge to the Superior Court on Administrative Matters of the Capital Region of Venezuela. He has also advised the former Venezuelan Congress on matters related to mining and electricity regulations and is a frequent lecturer on mining matters in Venezuela and has written several articles on mining and environmental law. He is a member of the Venezuelan Gold Association, Prospectors & Developers Association of Canada (PDAC), Rocky Mountain Mineral Law Foundation, Society of Mining Engineering (SME), and member of the Mining Committee of the Venezuelan-American Chamber of Commerce and Industry. Mr. Neher is also Director and Legal Advisor of the Venezuelan Mining Chamber and Director of the Venezuelan Canadian Chamber of Industry and Commerce.
March 03, 2005
Mr Reinier Lock
Foreign Mining Co.
Re. Minera Foreign S.A. and X Project
Dear Mr Lock,
The following are our comments and suggestions in connection with your letter of last week regarding the Farm-In agreement between Compa&tildecmb;n´cmb;ia Minera Foreign, S.A. ("Foreign") and Sociedad Minera Local ("Local") for the exploration, pre-feasibility and feasibility of X Project on X Property located in Venezuela (the "Transaction").
I. General Comments:
According to your description of the Transaction, Local appears to be the registered owner of the X Project assets, including the mining rights to the X Property. Also, your farm-in obligations under your agreement with Local appear to be conditioned to the immediate assignment by Local to Foreign of all assets, including mining rights, of the X Project. This would place Foreign in quite an advantageous position vis-&gravecmb;a-vis security for its investment, because it would own, from day one, all assets of the X Project.
However, the assignment to Foreign of all X Project related assets is not likely to be fully accomplished by the Closing Date, mainly because such transfers -especially those of mining rights- require prior approval from the Venezuelan Ministry of Basic Industries and Mines ("MBIM") (see 4. below) and this process, according to the law could take up to 45 days. Also, the law includes restrictions on transfer of mining rights until exploration and feasibility investment for such areas is completed. Therefore, if X Project has not been advanced to such stage, the proposed transfer to Foreign could be delayed until said stage is reached, which could take months. In view of this, we would suggest that the approval process for such transfer is initiated immediately but also that some indirect security on the relevant assets (i.e. pledge of Local shares, special mortgages on machinery, etc) is taken by Foreign right away and maintained until the transfer to Foreign of all mining rights and assets of X Project is complete.
Once assets of X Project are transferred to Foreign, we imagine that Local would want in turn to take some security over some of them to guarantee payment of its net profits royalty.
As an alternative to acquiring from Local the mining rights and assets to X Project and provided that Local is a special purpose vehicle for the X Project and has no other assets or projects, we would suggest that you explore the possibility of acquiring Local through the purchase of all of its share capital. Commercial transactions on shares of companies holding mining rights are not prohibited or subject to restrictions or authorizations by the Venezuelan mining authorities, unless those have been specifically included in the respective mining titles, which is quite rare. Therefore, acquiring the shares of Local instead of its assets and mining rights would allow the completion of the proposed Transaction without need of any government authorizations and thus within your proposed time frame. For this, you would need to structure the deal with the shareholders of Local, rather than with Local itself.
However, the acquisition of Local would include all liabilities of such company (unless assigned to a third party with the authorization of the relevant creditors) and therefore would require additional due diligence on Local's past operations, as well as negotiating with Local's shareholders appropriate representations and warranties on the legal and financial status of Local along with indemnities in case of inaccuracy of such representations and warranties resulting in a material adverse effect for Local and/or Foreign. The acquisition of Local should also include the assignment to Foreign of all of Local's inter-company accounts payable, especially those related to exploration activities of the X Property, as well as a settlement or a provision for the amount of Local's ongoing labor obligations at the time of the transfer.
The acquisition of Local would also allow Foreign to benefit from any of Local's capitalized expenditures for tax purposes.
In sum, acquiring Local instead of its assets would provide Foreign with greater security in terms of ownership of mining rights and assets, but would also include some risks derived from stepping into an ongoing operation and an existing company. However, most of those risks would be of a financial nature and some guarantees or security could be negotiated with Local's shareholders, including some security on their net profits royalty. Should you be interested in exploring this option, we could put together a proposal for a tax efficient structure for the acquisition.
II. Responses to specific questions:
1. Currently, exploration activities are being performed under the authority of rights issued as far back as 1999. Can we initiate operations under the authority of these same rights? If not, do we enjoy pre-emptive rights that guarantee us preference over mining rights?
Under the Venezuelan Mining Law (ML) of 1999 1 (in force since September 29, 1999) mining concessions and other mining rights granted under the former mining law of 1945 before the ML came into force, remain valid and in full force according to their terms, as amended by the provisions of the ML. 2 For instance, durations of concessions granted under the old law do not change and shall be those provided in their respective titles; and the "special advantages" offered to the Republic under the old law shall remain applicable. But other terms of such old concessions and mining rights have to be adapted to the provisions of the ML; for example, environmental requirements and regulations, special taxes and royalties, procedural matters, etc. Some of those provisions were applicable to the old mining rights as soon as the ML became enforceable (i.e. environmental regulations), but others would only apply a year after the ML came into force (i.e. tax provisions).
The ML included provisions that allowed the conversion into concessions of certain mining contracts for gold and/or diamonds issued by the Corporacion Venezolana de Guayana ("CVG"), thus converting their contractual rights into real estate rights.
Granting of mining rights for Copper and molybdenum were never delegated to CVG or any other entities, so any rights to such minerals have been granted by the MBIM (or its predecessor, the Ministry of Energy and Mines) through formal mining concessions in accordance with the ML.
In sum, Local's copper and molybdenum mining concessions, even if issued before 1999, remain in full force and effect under the ML and under the terms of the ML, provided however, that Local has timely and properly complied with each and every obligation derived from such mining titles and the law.
2. Are mining rights limited in time? Are water rights subject to the same regime? Can the government unilaterally modify or withdraw mining or water rights? If such is the case, on which grounds can it occur?
2.1 Duration of mining rights:
Under the Venezuelan Constitution 3 and the ML, 4 mining rights are inherently limited in time. Mining concessions include an exploration term of no more than four years, during which the concession holder must conduct an exploration program and, if warranted, prepare a regulatory feasibility study of the identified deposits and request before the mining authorities exploitation certificates over the areas of such deposits, but not exceeding half the area originally granted for exploration. Once the feasibility study has been approved and the exploitation certificates issued, the concession holder has seven years to bring the property into production. Exploitation rights are typically granted for an initial period not exceeding 20 years from the publication of the exploitation certificate granted by the Ministry of Basic Industries and Mines ("MBIM), with possible extensions, at the discretion of the MBIM, of no more than 10 years each and up to a maximum aggregate equivalent to the initial exploitation term.
As stated above, mining concessions prior to the ML will have the duration set...
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