Chapter 11 JOINT OPERATIONS: CHALLENGES AND TRENDS

JurisdictionUnited States
Mining Law

Chapter 11

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JOINT OPERATIONS: CHALLENGES AND TRENDS

Darrell W. Podowski
Jennifer Poirier
Cassels Brock & Blackwell LLP
Vancouver, BC

DARRELL W. PODOWSKI is a partner in the Business Law and Mining Groups at Cassels Brock & Blackwell LLP. Darrell advises mining, industrial, entertainment, technology, and biotechnology companies on going public transactions, corporate finance, merger and acquisition transactions and general corporate commercial matters in Canada and internationally. Darrell also has seven years of experience as an exploration geophysicist with Amoco Canada Petroleum Company and four years of experience as in-house corporate counsel to Teck Resources Limited, an international diversified mining company. Darrell has developed a strong expertise in negotiating complex purchase and sale transactions, international earn-in and farm out transactions, property option agreements, royalty agreements, strategic alliances, off-take and concentrate sale agreements, joint venture transactions and joint operating agreements. He is recognized as a leader in his field by Chambers Global, Chambers Canada, Lexpert and Best Lawyers. In addition, Darrell offers extensive experience with Latin America-related transactions and is regularly honoured as one of Latin America's "Top 100 Lawyers" by Latinvex.

JENNIFER POIRIER is a partner in the Securities and Mining Groups at Cassels Brock & Blackwell LLP. Jennifer offers experience acting for issuers and dealers in connection with public offerings, private placements and mergers and acquisitions. In addition, Jennifer advises private and public companies with respect to general corporate and securities laws issues, including corporate governance and continuous disclosure obligations. Jennifer also has experience coordinating and completing due diligence in a variety of industries and drafting and advising on a range of agreements, such as option agreements, memorandums of understanding, consulting agreements and partnership agreements. At Cassels, Jennifer serves on both the Women's Practice Development and the Student Committees.

Presentation Outline

Introduction and overview of presentation

a) This presentation will explore the legal and practical challenges of negotiating and executing complex mining joint ventures, including a look at joint venture management and decision making, funding and default mechanisms, transfer restrictions, and deadlock and dispute resolution mechanisms. We will also discuss trends currently evolving in the use of joint ventures in the mining industry.

i) The first part of the presentation will discuss the basic principles and challenges of joint venture relationships between mining companies in North America.
ii) The second part will discuss trends that have been evolving in joint venture operations of mining projects in North America.

PART 1

1) What is a joint venture?

a) The term 'joint venture' is commonly used, but in most jurisdictions the term is not a clear legally defined concept and not necessarily correctly or consistently understood. In some jurisdictions, joint ventures are considered a partnership, while in other jurisdictions such as Canada and Australia it is common for the unincorporated joint venture agreement to clearly deny the status of a partnership. The following is an example clause from a Canadian joint venture agreement:

No Partnership or Fiduciary Relationship
The Participants agree and declare that the Agreement must not be construed as constituting an association, corporation, mining partnership or any other kind of partnership and, except for the agency of the Operator specifically provided for in the Agreement, nothing in the Agreement will be deemed to constitute a Participant a partner, agent or legal representative of any other Participant for any purpose whatsoever and, nothing in the Agreement will create or be deemed to create a fiduciary relationship between the Participants, nor between the Operator and the other Participants or any of them.

b) Joint ventures are intended to be a more flexible form of business association (compared to a partnership or corporation) and similar arrangements are sometimes referred to using terms such as: strategic alliance, collaboration, joint development, joint operating, quasi-partnership, corporate joint venture and unincorporated association.

c) Mining joint ventures will typically have two main features that distinguish them from other relationships:

i) the joint venture property is not usually the principal commercial activity of each joint venture party. Instead, it is an extension of each party's commercial dealings where

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the resources, identity and/or skills of each participant complement those of the other participants. Taken together, there is some commercial or strategic value to justify the alliance; and
ii) the joint venture property is usually a single business project of a limited duration, or a business undertaking of a limited scope, rather than a series of projects.

d) One of the longstanding indicators of a joint venture is that the joint venture participants take product in kind rather than sharing in the profits of the joint venture.

2) Corporate or contractual joint venture?

a) There are two key types of joint ventures used in the mining industry:

i) the unincorporated joint venture, which is a contractual arrangement between the participants for the exploitation of mineral properties; it is merely a contractual arrangement between two or more participants who associate themselves for the purpose of carrying out a particular venture or activity, with each participant contributing funding, property and/or skill; and
ii) the incorporated joint venture, which involves the formation of a special purpose separate legal entity to own and exploit the mineral properties, with the participants being shareholders of the separate legal entity. It bears the characteristics of any other incorporated entity. The joint venture company will pursue the project activities in its own right and it, rather than the participants, will generally be the selling party under any product sales or offtake agreements.

Unincorporated Joint Ventures

b) Although the term "unincorporated joint venture" has not been clearly defined, its wide commercial use has caused it to be recognized as an unincorporated common undertaking of individuals to generate product with a view to sharing such product.

• Unincorporated joint ventures are creatures of contract and, unlike partnerships or corporations, have no statutory framework that specifically regulates them, which can of course, be one of their advantages.
• The parties are tenants in common in respect of their interest in the joint venture property, with several liability as between themselves (in most cases).
• The parties rights and duties to each other are fixed by, and within, the four corners of a joint venture agreement.

i) Unincorporated contractual joint ventures are commonly used in the mining industry of certain jurisdictions:

• In Canada, although most mining operations are structured as unincorporated joint ventures, there is no generally accepted version of a mining joint venture agreement, and it is up to the participants and their legal counsel to negotiate and agree to the form and content of the joint venture agreement.
• In the United States, parties may use the Rocky Mountain Mineral Law Foundation From 5, and 5A template agreements, which are akin to an unincorporated joint venture as they are governed by agreements, with the property generally held

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either by the manager on behalf of the venture or by the parties as jointly owned property.
• Lately, however, it is far more common in the United States to use the Form 5A Limited Liability Company ("LLC") template and to form a company in the State of Delaware; this is because of the dual benefits of liability limitation and flexibility in governance. The Form 5A LLC template agreement also differs from the Form 5 and 5A templates because the property is held by the LLC; however, the basic operation of the LLC is very similar to an unincorporated joint venture format through the flexible operating agreement.
• In Australia, most mining operations are structured using the Resources and Energy Law Association (formerly AMPLA, the Australian equivalent of the RMMLF) joint venture agreement templates.

Incorporated Joint Ventures

c) Incorporated joint ventures are more commonly used in other parts of the world, such as Latin America and Africa. The joint venturers, as shareholders in the special purpose company, will receive dividends from the profits of the company derived from the sale of product, rather than the product itself or the immediate proceeds of sale of the product. Typically, a shareholders' agreement will govern the business and management objectives of the joint venture and set out governance principles, funding mechanisms, cash distribution policies, operatorship etc.

Comparison

d) See diagram below depicting certain key differences between an incorporated joint venture and an unincorporated joint venture:1

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3) Why Choose a joint venture?

a) There are several reasons why resource companies choose to form joint ventures. A joint venture structure allows the participants to:

i) spread exploration
...

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