What Are Mining Investment Agreements?
Mining investment agreements are contracts between two or more different companies:One company (or group of companies) promises to invest money into a mining project operated by another company (or group of companies).
Mines are not profitable during exploration or at the beginning of operations; they can only become profitable once minerals are extracted (and often refined). As such, the structure of mining investments typically allows for a significant delay before the investors see any returns.
To ensure that financing pressures don’t limit cash flow and hamstring the development of the mining project, mining investment agreements often come in the form of streaming or royalty agreements:
- Streaming agreements are investment contracts in which the investor provides capital now (or over time) in exchange for the right to buy minerals from the mine at a predetermined price.
- Royalty agreements are investment contracts in which the investor provides capital now (or over time) in exchange for payments tied to production or revenue.
Equity agreements are also common in the industry, especially when a major invests in a junior that has mineral rights for a potentially viable region. Earn-in agreements, where the major slowly buys equity in the project by investing in exploration, are extremely common.
Key Terms In Mining Investment Agreements
Investor Rights & Protections
Investors may have certain rights that are outlined by agreements with host governments; though those agreements are outside of the scope of this article, they typically protect investors from instability by ensuring that the mine can continue to operate even if the government changes, and include provisions governing how investors will be compensated if the mine is forced to close.
Other clauses and terms that may be included in mining investment agreements are:
- Warranties that the mining company being invested in
- Owns the mineral rights to the area
- Has permits in good standing
- Is disclosing all environmental liabilities and requirements
- Is providing accurate geological data
- Has accurate, valid, and up-to-date regulatory filings and permits
- Anti-dilution clauses to protect equity investments
- Production reporting and audit rights for royalty and streaming agreements
- Protections if the mining company misses milestones, loses permits, or otherwise fails to meet obligations
- Provisions that tie funding to technical estimates, including:
- Drill results
- Resource estimates
- Production targets
This is not an exhaustive list of the rights and protections an investor may secure in their contract with the mining company; mining investment contracts are necessarily complex, owing to the high risk and variability of mining projects.
Exit Strategies
Mining projects carry a high level of risk, tremendous potential upside, and are often joint ventures between several different parties. Investments are tied to capital-intensive projects that may not generate returns for years.
These facets mean investors must look into exit strategies before they consider investing. Depending on the nature of the investment and the maturity of the mining project, exit strategies may include:
- Selling ownership shares
- Transfer of royalty or streaming rights, including royalty buyback rights
- Buyout provisions, including
- Forced purchase mechanisms/shotgun clauses
- Predetermined valuation formulas for buyouts
- Tag-along or drag-along clauses
- In tag-along clauses, minority investors can join a sale initiated by majority investors
- In drag-along clauses, majority investors can force minority investors to join a sale they initiate
- Milestone-based termination rights
- Wind-up provisions for when the mining project has reached the end of its life
Due Diligence In Mining Investments
Technical & Geological Assessment
Due diligence is a core part of any investment; for mining investments, technical and geological assessments are essential. Drill results, resource estimates, environmental impact studies, and other information provided by the mining company in question are key before any investment is made.
As part of the due diligence process, investors should receive written confirmation that all of the documents provided are accurate and true; this gives investors legal protection should they discover that there were misrepresentations during the due diligence process.
Legal & Regulatory Compliance Review
Mining projects sit at the intersection of local, provincial (or state), and federal law; Indigenous law, environmental law, and the influence of several regulators can all affect the viability of a venture.
During the due diligence process, investors should ensure that the mining company in question has all required permits or is well situated to obtain those permits and any other permissions needed from regulators. As a mining agreements lawyer, we can help investors navigate the complex frameworks governing mining law.
How Licata Law Can Help
We help clients looking to invest in mining projects navigate the complexities of mining legal services in Ontario. Our team can help you determine if a given mining project is likely to be compliant with local laws and regulations during the due diligence process. We can also assist with drafting investment contracts that include clauses to protect your investment.
Looking for a mining lawyer in Ontario? Contact Licata Law today.