4th Annual Investing in Africa Mining Seminar - London

Stéphane Brabant, Partner, Herbert Smith LLP29 November 2010

Strategies for achieving "Bankability" for mining projects in Francophone Africa

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Contents

I. General legal environment of a natural resource project in francophone Africa

II. Complexity of a mining project

III. What does "Bankability" mean to a lawyer?

IV. Instability and natural resource project

V. International soft law: a risk for Foreign investors

VI. Some specific risks attached to Africa

Need to know where the project is locatedand how it will be financed in order to decide what to do

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A continent of cultural and legal diversity

Like the rest of the world,

Africa isa continent of

diversity...

…with differentinfluences

and languages

Francophone countries

Spanish and Portuguese speaking countries

English speaking countriesArabic / French speaking countries

Arabic / English speaking countries

A world where 6,000 languages are STILL spoken – a number of them in Africa – but one international business language, the terms of which can have different meanings

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An Overview of African Legal Systems

Systems based on civil law principles

French legal system (Napoleonic Code)Portuguese, Spanish and Italian legal systems(largely based on Roman law)

Systems based on common law principlesMixed civil law / common law based systems

Two legal systems in Africa (sometimes complemented by Islamic law or customary law)

NATIONAL LEGAL SYSTEMSCommon law and civil law traditions

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Common Law(Prevalent law governing financing agreements, international contracts

and a number of Energy/ Natural Resource companies)

Contractual approach

Law of precedents

Two different legal approaches(State and Public / Strategic Interest)

• Negotiation (Negotiable vs. non negotiable)

• Drafting

• Settlement of disputes

Civil Law(Law governing Projects in mostnon-English speaking countries)

Main source of law: • Written rules• Administrative law and the courts• Mandatory Provisions• Case law (less important/limited

power of judiciary)Differences in: • Property law• Criminal law• Company law• Laws on taking

security• Insolvency law

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OHADA UEMOA CEMAC

Sub-Regional Organisations within Francophone West African Countries

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Actors of a natural resource project

Strict control

RESPECT OF HOST STATE’S LEGAL SYSTEM

(Stability – Arbitration)

• BANKS

DEPOSIT(Sovereignty/Res

Nullius/Ownership)

Access to site

ContractElections

Right to explore/exploit

(titles)Security

- STATE- NATIONAL COMPANY

MINING COMPANY(Exploration: Foreign InvestorsExploitation: Local Companies) • SHAREHOLDERS

STOCK EXCHANGE

POPULATION(Treaties / "Soft law")

• SUB-CONTRACTORS

• BUYERS• SUPPLIERS• NGOs

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DIVIDENDS

DEPOSIT

MININGCOMPANY

HOST STATE

EXECUTIVELEGISLATIVE

JUDICIARY PRIVATE

HOST COUNTRY

HOST STATE’S LEGAL SYSTEM

BANKACCOUNT

OFFTAKER

MINING/OILAGREEMENTS

EXPLOITATION PERMITS

PRIVATE LAW

(SUB)CONTRACTOR

WARRANTIES

SALE

$EXPLORATION PERMITS

OFFSHORE

$

$

EPC

$

BANKS

$

LOAN

HEDGE PROVIDER

$

HEDGE AGREEMENT

INTERNATIONALMINING/OILCOMPANY

DIVIDENDS

ECAs

ADMINISTRATIVE LAW

COURTSADMINIS-TRATIVECOURTS

What does a lawyer see when he looks at a natural resource project?Necessity for legal clarity where there is factual complexity

BANKACCOUNT

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“Bankability”…

= "Likely to Ensure Financial Success" *

… of natural resource projects

= All conditions (geology, prices, political, legal, etc.) for minerals in the ground to be: • Explored• Mined• Processed• Transformed• Transported• Exported• Sold…

With "profits" for all "stakeholders": a very (recent) specific condition required for a mining project to be long term, and thus “bankable”…

* Source : The free dictionary by Farlex, internet

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From a lawyer’s perspective

1. To identify what banks/ECAs "would" require in order to provide Project Finance (even if it is not) = the best guarantee for the project to:

• be a valid / binding / enforceable / long term natural resource project

• develop within an adequate legal framework for financing

2. It may also be best to first "value" a project as an asset (and to then find partners, etc.)

The lawyers of the sponsors must work with banks in order to anticipate what finance lawyers as well as potential partners may say = is it a "Bankable Project"?

What are the “Laws of the Bank”?

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Check how contract was awarded and approved

Ratifying legislation

Signatures by the correct people

Procurement rules

Transfers and assignments

Corruption

Ability to grant attractive security to Lenders

What are the risks that the government will seek to renegotiate terms?

What is the host state’s history of expropriation, renegotiation, unpredictable changes in law, arbitrary acts by the government, difficult government relations?

A Checklist of a "bankable" project

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Which laws apply (to the project)?

= Legal system of the host state

Civil law / Common law (Hierarchy of norms – Due Diligence)

• "Mining" titles (Exploration, Exploitation, Concessions, Chain of titles) = Security of tenure

• Oil and Gas / Mining agreements (Stability – arbitrability; STATE contract)

• Infrastructure• Company law• Security law• Laws of "Public Interest" (labour, tax, expropriation, etc.)

= to know and anticipate the law (and the overall context / environment) of the project

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Which laws will apply (to the financing)?

= The Law applicable to the Project Financing

The law of the financing (Common law) can be different from the law of the Project (Civil law) thus requiring a number of issues to be adapted, including:

• Exchange control regulations (borrowing from non-residents; offshore accounts; repatriation, etc.)

• Security over cash-flows• Security over project assets (shares, equipment, mining rights,

property rights, substitution rights, etc. vs. "floating charge")• Step-in rights and Direct Agreements• Offtake Agreements, EPCs, etc.

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Particular issues in relation to civil law security

• Type of security package (floating charges, trust structures, fiducie) - Practical difficulty in taking local security and ownership issues/rights

• Perfecting security – registration fees, renewal and notification requirements (particularly for immovable property)

• Enforcement procedures – pivotal and discretionary court procedure Transfer of ownership to the lender under court supervision Transfer of ownership to the lender pursuant to a contractual

provision (pacte commissoire) Sale of the asset at auction and distribution of proceeds

• Enforcement: Necessity for State consent – importance of direct agreements

• Taking security over foreign bank accounts – exchange control and repatriation requirements - Cash flows from onshore to offshore

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Bankability and security package (I)

Security Package – pragmatic approach to be adopted by thebanks

Security over mining title• Mortgage (hypothèque) over the Mining Title (where possible)• Mortgage (hypothèque) over the land (issues re public property)

Security over mining agreement

Security over production• Charge over inventory (nantissement de stocks)• Charge over movable tangible assets (nantissement de biens

meubles corporels)

Security over shares in local company• Charge over Sponsor’s share capital (nantissement de compte

d’instruments financiers/de parts sociales)

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Security over the business• Charge (nantissement) covering the business, goodwill,

equipment and facilities

Security over claims• Charge over bank accounts (nantissement de comptes

bancaires) (restrictions under OHADA)• Charge (nantissement) or assignment by way of security

(cession à titre de garantie) over trade receivables

Security over non tangible assets• Trade marks• Patent

Direct agreements• Direct Agreement with the State (including step in rights)• Direct Agreement with key third parties (including step in

rights)

Bankability and security package (II)

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Thorough Due Diligence

Protection under treaties – BITs

Protections built into State contracts• Stabilisation – do not try to cast the net too wide• Dispute resolution – but focus on settlement

Direct Agreements• Correcting title problems• Approving loans, security interests and hedging arrangements• Approving offshore bank accounts• Facilitating enforcement of security• Approving step-in rights

Bankability – Some key issues

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Stabilisation clauses i.e. contractual protection against subsequent changes to legal regime or certain aspects of legal regime

• "freezing clauses" – law applicable to contract will not change over the life of the project

• "renegotiation clauses" – agreement to adjust the economic terms of the contract (consider when this is triggered)

• "intangibility clause" – agreement by government not to terminate or amend contract

Responses to instability1. Stabilisation provisions

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International arbitration • Avoids local courts• "Internationalises" the contract

Bilateral investment treaty protection • Treaties between government of host state and government of

country where investor is incorporated• May offer additional or different protection• Political protection• Consider choosing your investment vehicle• Expropriation / Creeping expropriation / Fair and Equitable

Treatment

Responses to instability2. International Arbitration

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"Bankability" may depend upon a number of issues (aside from geology), some of the key issues being:• Volatility of commodity prices• Supply chain risks• Shortage of skilled workers• Escalations in development and operating costs

And:• HIV/AIDS• Xenophobia• Extreme political risks (creeping expropriation)• Infrastructure related problems (power shortages)• Changing legislation and regulatory reform• Physical limit to the number of commercially exploitable resources

available + "nothing available"…

"A booming industry in a changing world"

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International soft law: A “risk” for Foreign InvestorsExecutive Summary

1. HRs / States / Multinational Companies (MCs)

2. Thousands of recommendations, resolutions, etc. to/by States and MCs

3. Soft law with hard sanctions (T. Wälde): NGOs, Stock Market, Equator Principles, courts and reputational risk (new law makers for markers)

4. ISO 26000 and CSR, entry into force on the 1 November 2010

5. International Existing Agreements and Model Mining Development Agreement (IBA) – Draft 4 October, 2010

6. From soft law to International Public Interest (Kenya award 2006)

7. John Ruggie’s initiative or the 3 pillars for protecting HRs:• State to protect against HRs abuse by third parties including business• Corporate responsibility to respect HRs (to act with due diligence – to avoid infringing rights of

others)• Remedy: exploring options at all levels in order to obtain effective remedies

Guidelines for responsible contracting and markers for negotiation (2011)

8. To reconcile protection of foreign investments with treaty obligations on human rights (HRs) – Arbitration (Argentina – Suez case – July 2010)

From illegal to illicit and from illicit to illegal or HRs: the evolving legal value of an evolvingconcept

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Key Challenges arising when investing in Africa

Lack of clarity of some energy, mining, company and tax laws and their interpretation, or no relevant law

Erratic publication of regulations and case law and lack of consistency in the interpretation of the law (by local courts and administrative authorities)

New trend of "resource nationalism"/creeping expropriation (due to unstable governments or volatile price of natural resources)

Implied laws and mandatory laws mean that there may be more than the contents of the contract

Difficulty in finding viable local lawyers to advise on international projects

Corruption/transparency issuesPayment default risks for economic transactions with companies in

African states Influence of NGOS

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Not all risks can be addressed through intelligent legal drafting • Political risks / State counterparty

• Pricing: commodity prices and worldwide demand

• Geological and technology risk

• Environmental

• Sponsor (importance of due diligence on all stakeholders)

• Operational (escalations in development and operating costs, skills

• Shortages, infrastructure related (power shortages)

• Additional/heightened risks for integrated projects (supply chain, infrastructure … etc.)

• Reputational risks

• Social risks

The fundamental risks of an African mining project

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The role of extractive industry lawyersis becoming more and more complex

Conclusion

Better than a "Political Risk Insurance":• "Fair sharing of benefits between the company, the local

community and national governments"• A well-balanced and drafted contract from scratch• Legal, licit and legitimate

Resource curse/blessing: an issue concerning all with consequences for all

"Competent counsel can no longer afford to neglect relevant international 'soft law'"