CHAPTER 10 DOMESTIC AND INTERNATIONAL URANIUM VENTURES AND LLCS
| Jurisdiction | United States |
(Apr 2006)
DOMESTIC AND INTERNATIONAL URANIUM VENTURES AND LLCS
Holme Roberts & Owen LLP
Denver, Colorado
JAMES F. CRESS
James F. Cress is a partner in the Denver office practicing in the commercial law and securities and natural resources groups. His general corporate practice includes acquisitions and derivatives. His natural resources practice emphasizes international and U.S. mining and oil and gas law transactions, including financing. He has been with the firm since 1988. Mr. Cress' practice is primarily transactional. His general corporate practice includes development, implementation and documentation of derivatives trading programs for corporate end-users of derivative products, including oil & gas, precious metals, interest rate and currency hedging programs, as well as synthetic debt instruments with derivates components. He also has extensive experience with derivatives. In the natural resources area, he has negotiated and documented complex acquisitions, asset dispositions and financings for coal, uranium, gold, copper, oil and gas and other mineral-producing clients. He has experience in private and U.S. federal mineral royalty matters. He has advised clients on the development, implementation and interpretation of mining law and regulation in the U.S., Asia, the former Soviet Union and Latin America. His international experience includes negotiation of substantial investments in developing countries, including negotiations with host governments, and includes recent work in the Philippines, Kazakhstan, Mexico, Argentina, Peru, Ethiopia, Brazil and Burma. He also teaches at the University of Denver's Graduate Studies Program in Natural Resources and Environmental Law. Education: J.D., University of Denver, summa cum laude, 1988 (Order of St. Ives Honorary Society; Associate Editor and Technical Editor, Transportation Law Journal; University Of Denver Scholarship; Coulter Scholarship; Janet W. Starkey Scholarship; Denver Transportation Club Scholarship); B.S.J., Northwestern University, with honors, 1983 (Kappa Tau Alpha Honorary Society; National Merit Scholarship; McCormick Journalism Scholarship). Member of the American Bar Association, Section of Energy, Environmental and Resources Law (former Vice Chair, Public Lands Committee and contributor to Year In Review); Colorado Bar Association, Mineral Law Section (Chair 2001-02; Vice Chair 2000-01; Secretary/Treasurer 1999-2000; Council Member since 1997; Colorado Bar Association, International Law Committee; Rocky Mountain Mineral Law Foundation, (Revision Author, American Law of Mining, 2d Ed.); Mining Chair for 1998 Annual Institute; Editorial Board, Form 5A Joint Venture Agreement, Form 7 Confidentiality and Non-Disclosure Agreement; Publications Committee); International Mining Professionals Society; Colorado Mining Association (Co-Chair, Mining Law Review Committee, 1998-99); listed in International Who's Who of Mining Lawyers, 1999-present; International Trademark Association; University of Colorado Natural Resources Law Center, board member, 2000-02; Annual Survey of Colorado Law (Author, 1989-96, Editor, 1996-98, Mining and Public Lands Law). Admitted in Colorado since 1988.
[1] Introduction1
At the Rocky Mountain Mineral Law Foundation's last Uranium Special Institute in 1976, Hal Bloomenthal explored "The Evolution of the Uranium Joint Venture."2 His listing of the common problems and characteristics of uranium ventures sketched the familiar outlines of what eight years later became the Foundation's "Form 5":3
(1) A sharing of the fruits of the venture on a specified basis either as profits or in kind.
(2) A sharing of the risks of the venture on a specified or implicit basis.
(3) Contributions to the venture -- very often, but not universally, primarily properties by one party and contributions in the form of cash by the other. After a designated stage is reached both parties may be obligated to contribute cash.
(4) The management structure -- one of the parties typically being vested with authority to carry on operations and the other party participating within limitations varying, at one extreme, from the right to dictate, to merely the right to be consulted.
(5) Planning for and funding exploration, development and production.
(6) Disposition of the product -- ore or concentrates.
(7) The timing and scope of activities -- particularly, the timing for placing properties into production. 4
These basic features of a uranium venture have not changed, and are embodied in Form 5 and its more recent variants, "Form 5A"5 and "Form 5A LLC."6 In fact, Form 5 had its roots in the early uranium exploration period of the 1950's and 1960's. The development of modern mining joint venture agreements was spurred in part by oil and gas companies branching out into the uranium business, bringing their extensive history of using form oil and gas operating agreements.7
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The fruits of that effort, Form 5 itself, arrived too late, however, as the last uranium boom came to an abrupt end about the time of its publication in 1984. The two decades since have been challenging times for the U.S. uranium mining industry. Nuclear plant construction halted after the Three Mile Island accident. Existing mines and mills were placed on standby, and remained on standby for years awaiting a recovery in uranium prices. Many mines and most of the uranium mills in the United States were shut down and reclaimed. A comprehensive environmental regulatory regime for uranium tailings was promulgated under the Uranium Mill Tailings Radiation Control Act of 1978,8 with the Nuclear Regulatory Commission and Environmental Protection Agency sparring over jurisdiction.9 Large inventories of uranium built up during the 1970s depressed prices. Uranium exports to the United States from the Soviet Union, and later the Commonwealth of Independent States ("CIS"), further depressed prices, resulting in an antidumping investigation and a series of suspension agreements with shifting quotas for CIS uranium exports throughout the 1990's.10 The market for mined uranium was further skewed by the "Megatons to Megawatts" program, through which 500 tons of Russian highly-enriched, weapons-grade uranium are being converted to fuel commercial nuclear power reactors. After this long decline, U.S. uranium production in 2005 (while edging up since 2003) was an anemic 2.7 million pounds of U3O8, produced from five processing facilities, with only one of the four remaining conventional uranium mills intermittently processing alternative feed.11
The long decline of the U.S. uranium mining industry seem to be nearly over. With prices currently topping $40 per pound, mining companies are once again exploring for uranium and readying old prospects for production. By some estimates, several hundred companies are jockeying to participate in the nascent resurgence of the U.S. uranium mining industry. Given the difficult period that the industry has just passed through, some additional characteristics can be added to Bloomenthal's list for the new uranium joint ventures that will spring from this new activity:
(8) Possibly extensive land holdings, including unpatented mining claims, many with historic uranium production and potential environmental liabilities.
(9) A complex and potentially time-consuming regime for permitting, constructing and reactivating uranium mining and processing facilities (both conventional and in situ leach).
(10) An increase in foreign companies conducting uranium exploration in the U.S., including a number of junior companies raising equity on the Canadian TSX Venture stock exchange and similar mining-friendly exchanges in London and Australia.
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(11) The promise of in situ leaching as a lower cost, and potentially environmentally preferable, alternative to conventional mining and milling.
(12) The use of alternative feed and direct disposal as alternative business strategies during periods of low uranium prices.
(13) The continuing challenges of marketing uranium in light of the complex interplay of government intervention and free market forces.
(14) Competition from massive deposits of higher grade uranium in Canada, Australia, Kazakhstan and other countries.
This paper focuses on the use of the Foundation's three joint venture vehicles (Form 5, Form 5A and Form 5A LLC) to document uranium exploration and development transactions in the U.S. in this new era, including specific provisions that should be considered for modification in uranium deals to address the above characteristics, both new and old, of the uranium mining venture. The paper examines recent litigation involving uranium ventures during the difficult last two decades for lessons learned. It also examines recent uranium venture agreements available publicly through the SEC's EDGAR website and the SEDAR filing system of the Canadian Securities Administrators, for sample provisions specific to uranium ventures between mostly junior exploration companies.12
[2] Domestic Uranium Joint Ventures
[a] Comparing Form 5, Form 5A and Form 5 LLC
Appendix 1 contains a broad comparison of Form 5, Form 5A and Form 5A LLC. All three forms are based on the assumptions that one party, "XCO," owns a mineral property and contributes it to the venture, and the other party, "YCO", earns a 50% interest in the venture by completing its initial contribution. The (not necessarily representative) sample uranium venture agreements we reviewed were almost universally based on Form 5 rather than Form 5A. Often, however, concepts are borrowed from Form 5A, such as the creation of an "Environmental Compliance Fund" to provide for reclamation and environmental remediation.
In general, Form 5 seems to permit more flexibility for early stage uranium exploration deals. Form 5A quite...
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