CHAPTER 13 URANIUM ORE PURCHASE AND CUSTOM MILLING AGREEMENTS
| Jurisdiction | United States |
(Nov 1976)
URANIUM ORE PURCHASE AND CUSTOM MILLING AGREEMENTS
Davis, Graham & Stubbs
Denver, Colorado
Table of Contents
I. Introduction
II. General Provisions and Issues.
A. Conditions Precedent to the Agreement.
B. Nature of Commitment of the Parties.
C. Uniform Commercial Code Considerations.
D. Ore Specifications.
E. Sampling; Assays; Resolution of Disputes.
F. Government Regulation.
G. Force Majeure Clauses.
H. Additional Matters.
1. Commitment of Additional Properties.
2. Covenants Running with the Land.
3. Arbitration.
4. Effect of Changes in Government Regulation.
5. Set Off Rights.
6. Assignments.
III. Payment Provisions in Ore Purchase Agreements.
A. Methods of Computing Amount Payable.
B. Payment Components.
C. Timing of Payments.
IV. Custom Milling Agreement Provisions.
A. Quantity and Specifications of Concentrate Returnable to Owner.
B. Payment of Processor.
C. Unused Capacity Fee.
Footnotes 13-17
Appendix I—Ore Purchase Agreement
Appendix II—Custom Milling Agreement
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Introduction
Participation in the uranium industry at the grass roots level, as in any of the minerals extractive industries, can only be characterized as an exceedingly high-risk undertaking. The chances of failure are particularly great because participants must not only be successful in their dealings with competitors, as in other endeavors, but they must surmount the vagaries of nature itself (which at times appear to rise to the level of a conscious malice) in order to locate commercial ore deposits. The risks associated with this second obstacle are inescapable and only manageable to a limited degree. In the final analysis the operator must simply accept such risks, relying on the rewards from a few successful efforts to outweigh the costs and disappointment of many failures.
After successful location of a commercial uranium deposit, however the remaining obstacles to successful development essentially revert to those typical in all competitive situations; namely they are largely of the "manageable" variety and can be overcome or dealt with by careful planning and preparation. In the context of this presentation, such planning should include and focus on the preparation of a carefully drafted ore purchase or custom milling agreement.
Scant attention has been given in the legal or technical literature to uranium ore purchase and custom milling agreements,1 and no standard or suggested forms for such agreements have been proposed, as have been for a variety of agreements and instruments in other mineral extractive industries.2 A number of superficially similar forms for ore purchase and custom milling agreements have evolved in the uranium industry, largely because of their common ancestry with the forms of agreement used by the Atomic Energy Commission, but their differences are at least equal to their similarities.
The purpose of this presentation is two-fold. First, because the sale or other disposition of ores discovered by
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uranium exploration and development is an integral part of the industry, if not the ultimate objective, a review of the important considerations involved in structuring agreements for ore sale or other disposition is a logical portion of this institute's overall goal of a general review of the uranium exploration and development industry. Second, in view of the lack of literature or accepted standard forms for such agreements, an initial attempt to propose such forms ought to be of benefit to the industry, even if such forms merely provide the individual operator with a basis for comparison with agreements proposed for specific transactions. To that end, a proposed form of Ore Purchase Agreement is appended hereto as Appendix I, and a proposed form of Custom Milling Agreement is appended as Appendix II.
The forms are based upon a review of a number of examples of each type of agreement, general experience in the area, and comments and suggestions offered by individuals active in the mining and milling of uranium ore.
A warning regarding use of the forms is in order. They are exceedingly general, as is intended, and should be utilized only after careful review and with great caution. Indeed, their most beneficial use, together with the comments and suggestions herein, will probably not be as a final form of agreement, but as a checklist to assist in identifying potential issues or problems and suggesting possible solutions to them.
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II. General Provisions and Issues.
As will be apparent from a review of the attached forms, the Ore Purchase Agreement and the Custom Milling Agreement have a number of similar provisions, and they share common issues which should be considered by the parties in negotiating such agreements.
A. Conditions Precedent to the Agreement. Either of the parties may require the agreements to be subject to satisfaction of certain conditions precedent. Obviously the purchaser of ore wants to be sure that the seller actually has and legally owns the ore to be sold, and that the ore is amenable to mill processing, particularly if the ore purchaser is making a prepayment or is dedicating plant capacity and making concentrate sale commitments based on the agreement. The purchaser or miller may also want to assure itself that the ore is mineable at economic rates, that such mining has been approved by governmental authorities, and that the seller has the financial resources and access to skilled labor and necessary equipment necessary to produce such ore at the agreed rates. Similarly the seller or owner of ore may wish to satisfy itself that the ore processor can concentrate such ore as and when the agreement provides therefore. Obviously this list is incomplete. It is intended merely to illustrate the point that it is critically important for each of the parties to such agreements to identify their fundamental assumptions and requirements, and, with respect to those which are unsatisfied at the time of execution, to require that they be satisfied as a condition of the agreement. If such conditions are imposed, consideration should also be given to providing a date by which the conditions must be met or the agreement terminated.
B. Nature of Commitment of the Parties. The agreements frequently fail to contain a clear statement of the intentions of the parties and incomplete descriptions of their various commitments. For example, ore purchase agreements will often have a stated fixed term, a maximum monthly ore delivery rate, and a commitment to sell and purchase all ore mined and sold during the term of the agreement. Such a format leaves uncertain the miner's rights to have his ore custom milled, rather than selling it under the agreement. Also the miner probably can elect not to sell any ore at all, stockpiling ore mined rather than shipping and selling it, contrary to the intent of the parties. It is recommended that the seller be required to continuously operate the properties, to the extent
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economic, and that the agreement contain an affirmative commitment to sell all ore mined.
Similarly, under milling agreements it is important to obtain a commitment from the processor with respect to when it will process ore delivered and when it will return concentrates therefrom. In the absence of a clear commitment, the processor may elect to accumulate ore into lots and to hold them for substantial periods without processing to suit its other milling commitments.
Again, these examples are not intended to be exhaustive, but merely to illustrate the importance of seller and purchaser carefully thinking through the transaction and then drafting an agreement which clearly reflects all terms of the agreement.
C. Uniform Commercial Code Considerations. Article 2 of the Uniform Commercial Code (UCC) clearly applies to ore purchase agreements, since such agreements involve the purchase and sale of ore, which is personal property. Article 2 may also apply to custom milling agreements, which are commonly structured as service agreements rather than sales transactions. A thorough analysis of that question is beyond the scope of this presentation, and in any event the conclusion would not be free from doubt. However, application of the UCC to custom milling agreements may occur either because courts are willing to apply such principles by analogy to pure sales transactions;3 or because the contract is a mixed services-sale agreement since title and ownership, at least to the tailings, passes to the mill owner;4 or because Article 2 is not limited to "sales" but includes all "transactions" in goods.5
The applicability of UCC Article 2 provisions to these agreements should be assumed, as a matter of prudence. Although such application has a number of ramifications, the principal one relates to the creation of express warranties6 with respect to ore and concentrate quality and automatic imposition of implied warranties of merchantability7 and fitness for a particular purpose.8 The agreements should clearly define the scope of any express warranties and the remedies for breach, and if warranted, a disclaimer of any implied warranties of merchantability or fitness for purpose with respect to ore or concentrate.
D. Ore Specifications. Under either of the agreements, it is important for the buyer or processor to insure that the ore meets specifications which will permit it to be processed in the
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mill on an economic basis. Confirmation that such ore can be processed is typically accomplished by two mechanisms: first, by analysing and processing representative ore samples on a bench sample basis to confirm in advance ore amenability; and, second, by stating fixed requirements with respect to (i) minimum uranium content, (ii) maximum moisture content and piece size, (iii) freedom of ore from...
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