ALTERNATIVE MINE FINANCING

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 20A
ALTERNATIVE MINE FINANCING
Sergio Orrego F.
Verónica Roa ¹
Partner
Urenda, Rencoret, Orrego y Dörr Abogados, Ltda.
Santiago

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SERGIO ORREGO is a Partner with Urenda, Rencoret, Orrego y Dörr Abogados Ltda. in Santiago. He joined the Firm in 1982 while attending Law School. Admitted to practice in 1986, he also worked as a foreign associate at Sullivan & Cromwell, New York (1991-1992). His areas of specialty are Corporate Law, Energy and Natural Resources Law, Mergers and Acquisitions, Project Finance, and Foreign Investment. He has provided legal assistance to local and foreign clients in a variety of transactions relating to important mining projects, banking, power supply, mergers and acquisitions, joint ventures, project financing, foreign investments, etc. He also advises in general corporate matters. He has advised both domestic and foreign mining companies in different development stages of their projects, including: constitution of mining property, tender and grant processes for the construction and/or expansion of extraction plants and auxiliary facilities, project financing, negotiation of joint ventures and execution of mining option agreements, constitution and sale of mining royalties, acquisition of waters rights required for the expansion of big copper mining projects, etc. (he has advised, among other clients, BHP Billiton, Minera Escondida Ltda., Minera Spence S.A., Minera Meridian Ltda., Royal Gold, Inc., Sociedad Química y Minera de Chile S.A., Minera Cyprus Chile Ltda., etc.). He has been named as one of the leading lawyers in the development of mining projects in Chile by Chambers Global and Chambers Latin America. He participates as member of the Board of Directors of private and public companies. He is a member of the Chilean Bar Association. He also participates as member of the Board of Directors of private and public companies.

I. INTRODUCTION

Royalty Agreements and Streaming Agreements are relatively new tools to finance mining projects in Latin America ("LA"). In countries like Chile, they are not expressly regulated by the law. If not defined, they are unnamed contracts -contratos innominados-, where the terms and conditions of the agreements will depend on what the parties agree on provided they are not acts prohibited by the law.

However, there is another contract that is currently regulated in some LA legislations (or was regulated in prior mining codes) and comes from the old times, which allows the miner to obtain financing for a project in a non-traditional way. This is the Avío contract.² In essence this is an aleatory contract or contrato aleatorio by means of which a person commits to give or to do something for the benefit of the exploitation of a mining concession or pertenencia, to be paid only with the products obtained therefrom or with an ownership quota of such mining concession. The financing party is the "Aviador" and the owner of the mining concessions is the "Miner". If the parties decide to alter any of the essential characteristics, it would turn into another type of contract.

The essential obligation of the Aviador is to do something or to provide the Miner with something for the benefit of the pertenencia, which can be money but also movable assets. The Miner, on its turn, has to manage the pertenencia (liable for ordinary negligence) and invest the money or the movable assets in the exploitation of the pertenencia. Failure to do this puts the pertenencia under the management of the Aviador. Same thing happens if the Miner manages the pertenencia in a careless way.

The Avío has to be granted in writing, and to be enforceable vis a vis third parties it has to be registered in the Mortgages and Encumbrances Registry of the relevant Mining Registry. It gives the Aviador a "derecho rear", which is a right that can be exercised regardless of the person who holds the mining concession. The Aviador then, has the right to be paid with the products obtained from the mining concessions regardless of who owns them. The contract runs with the mining concessions.

II. LEGAL ISSUES FOR FINANCIERS TO CONSIDER WHEN TAKING SECURITY IN PROJECT ASSETS NOTING IMPORTANT DIFFERENCES UNDER MINERAL TENURE, BANKRUPTCY, AND OTHER LAWS IN VARIOUS LA COUNTRIES.

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2.1 Overview. In general, in LA countries (such as Chile, Perú, Bolivia and Argentina³ ) mining concessions are deemed to be a derecho real and it has the same nature of a real estate (derecho inmueble). Therefore, ownership of a mining concession is subject to registration in the relevant Mining Registry (the one corresponding to the location of the property), as well as any other derecho real on the mining concessions, such as a mortgage. Thus, a lien on a mining concession such as a mortgage will only be enforceable vis a vis third parties from the date of registration in the relevant registry.

It is important to determine whether, under the applicable legislation, a royalty right is a lien on the mining concessions (and as such, should be registered) or it just gives the holder a "personal right" or credit, in which case the right can only be claimed from a certain party that in fact has acquired the obligation, their successors or legitimate assignees, but it will not be enforceable vis a vis third parties. If that is the case, the right of the financier will not run with the mining concessions and the holder of such right will only be entitled to claim it from the party who executed the agreement. Therefore, if the mining concessions subject to a royalty are transferred to a third party, the contractual obligation contained in the royalty agreement will not be enforceable against the new owner. Likewise, as a matter of law being the streaming agreement a metal purchase agreement, the obligation to deliver gold to the stream company will not follow the new owner of the mining concessions once such concessions are transferred to a third party.

a) Prohibitions and guarantees. If the royalty right is not a right that runs with the mining concessions in a particular legislation, it is critical for the financier to obtain some sort of assurance that the mining company will not dispose of such concessions nor execute certain acts or contract regarding the same, and also that there are valuable assets to respond in case of default of the payment of the royalty obligation. Thus, the mining company should constitute a prohibition to dispose of the mining concessions without the prior consent of the other party and also a lien in favor of the financier (i.e. mortgage on the mining concessions or the superficial land; pledge on the minerals, extracted), both of which will be registered in the relevant Mining Registry and will be enforceable vis a vis third parties therefrom. The above, provided that the agreement is governed by local law and is granted according to the formalities provided in the relevant legislation...