Exclusive Q&A on Mining with Darrell Podowski
In June 2015, the Federal Government of Canada implemented the Extractive Sector Transparency Measures Act(the “Act”). The Act requires entities in the extractive sectors to disclose payments made to government entities through a number of new reporting requirements.
Canadian businesses captured under the Act are required to annually report monetary or in-kind paymentsmade to any domestic or foreign government in relation to the commercial development of oil, gas or minerals in any country under certain circumstances, in excess of CAD$100,000.
The Act requires companies to issue reports for each financial year beginning after June 1, 2015. On March 1, 2016,the government finalized a guidance supplement to the Act and implemented additional reporting procedures.
On May 9, 2016, new securities regulations governing hostile take-over bids (the “TOB Rules”) are expected to be implemented in Canada. The new TOB Rules extend, in general, the period that a take-over bid must remain open, from 35 days to 105 days. This change will alter the M&A landscape in Canada making it more difficult for buyers to complete such take-overs.
Can you talk us through the current mining landscape in your jurisdiction?
Recent developments in aboriginal law have had a formative impact on the Canadian mining landscape. In certain circumstances, companies are legally obligated to consult and, if appropriate, accommodate aboriginal peoples when a proposed mineral project could adversely impact aboriginal rights or title claims.
The threat of litigation over a breach of the duty to consult can inject uncertainty into the process of developing a mineral project in Canada, as it is difficult for companies to predict exactly what lengths they will be required to go to in order to satisfy their legal obligations to aboriginal peoples. Additionally, in 2014 the Supreme Court of Canada issued a landmark decision and declared for the first time the existence of aboriginal title in certain defined areas in the province of British Columbia. The impact of this decision on all areas of Canada remains to be seen, as courts have not yet declared the existence of aboriginal title elsewhere. Companies should be aware of this recognition of aboriginal title which, combined with the ongoing duty to consult, has had an impact on the current mining landscape. However, companies that engage in timely, thorough and culturally sensitive consultation with aboriginal peoples can minimize the risk of any conflict with affected aboriginal groups and can avoid costly litigation that may delay or cancel a project.
What impact has weak commodity prices had on mining strategies?
With the decline in commodity prices over the past 5 years, mineral exploration and mining companies have drastically altered their strategies to cope with the weak capital markets and reduced revenues. Companies, both big and small, have slashed or eliminated exploration programs, significantly cut work forces and have trimmed operating costs as much as possible. Five years ago, companies were paying top dollar for assets, and now there is an M&A malaise as there is a perception that it is value-destructive. As a result, mining strategies have shifted from past practices toward portfolio optimization, concentrating on core assets and commodities, and seeking selective acquisitions, with little effort being put into green field exploration. In addition, companies are exploring other ways to develop their projects by seeking joint venture partners either to develop one project, or by entering into joint ventures with neighbouring projects to take advantage of synergies to save costs. They are also putting together alternative financing packages on their projects, such as royalty and metal streaming packages, to source revenue and optimize value from their current land holdings.
The challenging economic climate in the mining industry is causing many companies to either wind back or abandon projects. What termination risks need to be considered before suspending or terminating any projects?
In suspending/terminating a mining project the objective is to minimize expenditures and/or cut operating losses, whether an exploration or operating project.
The following must be considered: loss of property or contractual title rights for failure to perform work/make expenditures; one time/ongoing environmental/rehabilitation obligations (care and maintenance/monitoring obligations); contractual obligations (option/joint venture, financing covenants (flow through share covenants, debt covenants), metal sales or off take commitments, supplier contracts); common law/statutory/contractual costs of employee termination/relocation, loss of quality employees, and costs of compliance with applicable collective agreements.
Consideration must also be given to stakeholder relationships: employees/unions, shareholders, suppliers, local governments/communities/indigenous communities.
Can you discuss the current merger & acquisition landscape?
The mining sector has experienced a decline in deal activity over the past five years. For the most part, M&A in 2016 will likely continue to follow the trends of 2015, and will likely be driven by divestitures. Emphasis will likely remain on trying to simplify portfolios by selling non-core (and sometimes core) assets, reducing capital expenditures and operating costs and seeking debt reduction. Shareholders are in large part driving this sales agenda. Expect to see increasing levels of non-cash consideration, deferred consideration and joint ventures so long as we remain in the present environment. However, a hesitancy still remains for companies with cash resources looking for assets, to buy. Ironically, given the state of commodity prices and the low valuations of miners, it is likely an ideal time for companies to be an acquirer. Companies prepared to buck the trend may reap long-term rewards.
Which countries are currently ripe for investment?
Although the past decade has been difficult for investors looking into Argentina, the recent change of government presents a positive change and distinct potential for investment in Argentinean mining. Since December 2015, Argentina has taken a number of significant steps to revitalize its mining industry and provide investors with a certain level of confidence and comfort looking forward, including thelifting of currency controls, elimination of export taxes, lifting of certain import restrictions allowing for international sourcing of equipment, and restarting negotiations with holdout bondholders from Argentina’s 2001 default. The government has also lifted restrictions on repatriation of earnings and dividends. A devalued Argentinean Peso may also result in lower costs for project development.
Africa, more broadly, also has a number of countries that have strong investment potential, though political stability and lack of infrastructure remain a general concern across the continent. Notably, the government of Botswana has made deliberate efforts to make its mining industry conducive to investment.
Darrell Podowski is a partner with Cassels Brock & Blackwell LLP in the Vancouver, Canada office. Darrell practices business, mergers and acquisitions, mining and securities law, advising resource and industrial clients on going public transactions, corporate finance, merger and acquisition transactions and general corporate commercial matters in Canada and internationally.
Prior to his law career, Darrell was as an exploration geophysicist with Amoco Canada Petroleum Company and also in-house Corporate Counsel to Teck Resources Limited, and therefore Darrell possesses a particularly strong understanding of the commercial needs of his clients. In addition, he has a great deal of experience with Latin America transactions, and offshore experience as a result of his time working with a large Bermuda law firm.
Darrell can be contacted on 604 691 6129 or by email at firstname.lastname@example.org