CHAPTER 2 SELECTING THE APPROPRIATE CONTRACTUAL VEHICLE TO ACQUIRE MINERAL EXPLORATION RIGHTS
| Jurisdiction | United States |
(May 1981)
SELECTING THE APPROPRIATE CONTRACTUAL VEHICLE TO ACQUIRE MINERAL EXPLORATION RIGHTS
DeConcini McDonald Brammer Yetwin & Lacy, P.C.
Tucson, Arizona
The problem of acquiring mineral exploration rights by contract is relatively new to the hard rock mining industry. Typically, the prospectors and adventures had gone to the wilderness areas of the Western United States, discovered promising outcrops of mineralization and staked claims on public domain of the United States. Those with money purchased mines in preliminary stages of development from the prospectors who happily went into the next mountain range in search of the mother lode.
As technology has become more sophisticated, the remote senses of electronic equipment have opened up many areas to mineral exploration once thought to be completely barren. Because the mineral potential of these areas has never been recognized, they are frequently in private ownership having previously been patented as "non-mineral" lands. The exploration industry thus frequently finds itself now looking at exploration targets that encompass blocks of private land with the resultant problems of determining the most appropriate way of acquiring rights to explore these areas.
The decision facing the manager of an exploration program is to choose a method of acquiring the rights that he needs and selling his desires to a landowner who may or may not be interested in the mineral potential of his farm, ranch or homesite. It is probably appropriate to consider initially the underlying motivations of the parties to such a transaction and develop a contract to meet these expectations. A non-participating owner wants assurance of income; a participating owner wants assurance of profit; and an operator-user wants an assured supply of product. The problem thus becomes one of choosing the right ingredients and mixing them in such a way as both the mineral explorer and the landowner are satisfied that they have the control
[Page 2-2]
and flexibility in managing their respective interests in the same land.1
I. Granting Clauses
The basic ingredient of our recipe for a harmonious relationship is the granting clause of the contract. There are five basic relationships that are commonly used to acquire exploration rights. These basic relationships, in order of complexity (with a parenthetical indication of the overriding consideration in entering into the relationship), are as follows:
• Exploration licenses (information);
• Options to enter into some other type of relationship, usually a purchase contract or a lease (time to develop information sufficient to evaluate price);
• Purchase agreements (end price);
• Leases (cost); and
• Joint operating agreements (partner capability).
Each one of these rights carries with it a specific end result, and many of them are of necessity related to each other.
Licenses
A license is a privilege and not a right in the land itself. A license permitting access to property for mineral exploration activities can be as broad or as narrow as the parties wish. The typical situation where a license is useful is where a very general or regional exploration program is being conducted, usually by the use of ground geophysics, and the exploration company is seeking to establish a regional data base for a subsequent specific exploration program. Under these circumstances, a license
[Page 2-3]
permitting the explorer limited surface access for the conduct of geophysical or geochemical surveys is a common and relatively inexpensive way of doing regional evaluation.
It frequently happens, however, that in the course of specific evaluation the landowner, usually a farmer or rancher, either has a deep seated distrust of any relationship with a mineral explorer or he simply doesn't want any encumbrances complicating his ability to either farm or sell his property. This frequently results in the landowner's requiring the mineral explorationist to prove the existence of some valuable mineral before he will even consider the possibility of entering into any permanent relationship. Under these circumstances, a mineral explorer is in a real quandry. If he proceeds with only an exploration license and finds something worth pursuing, the landowner may decide he wants to "shop" his property with the benefit of the preliminary work performed by the explorer. One possibility for minor protection in this regard is to keep control of any information developed. This information may have meaning only in relation to what may be known about adjacent lands, and under such circumstances would not be particularly damaging if the landowner obtained this information. If, on the other hand, the information related specifically to the mineral potential of the particular land being examined, and you are required to permit the landowner access to such information, the exposure is formidable.
Thus, in order to make this bare privilege a reasonable business relationship, it must be coupled with, at the very least, a right of first refusal or option. Frequently, however, a landowner is not willing to grant such rights for a number of reasons, and then the explorer is faced with a decision whether or not he is willing to take the risk that the information found will be beneficial to his general exploration program or whether he feels he can be persuasive enough to convince the landowner to enter into a permanent relationship with both sides knowing more information concerning the ground. Under these circumstances, many landowners, as a gesture of good faith, are willing to grant the explorer a right of first refusal2 to meet any other offers that the landowner is willing to accept for the acquisition of some permanent rights in his property.
[Page 2-4]
Options
An option is an irrevocable offer that grants the optionee the right to enter into a subsequent relationship under specified terms. The rights acquired upon exercise of the option may or may not relate back to the initial date of the option, and it is therefore important to make specific mention of any permissible or impermissible encumbrances upon title to the property during the term of the option. For example, if the optionor is permitted to mortgage the property, and the option is subordinate to the mortgage, the amount of the ultimate lease or purchase price should be sufficient so that the encumbrance could be satisfied. Because the option is a grant of a right to enter into a future relationship, the rule against perpetuities applies, but note, however, that this would not apply to an existing lease where the lessee were permitted to exercise an option during the term of the lease.3
One problem that may be inherent with options is the possibility of the optionor's bankruptcy. In such a case, the optionor's trustee in bankruptcy may be able to reject the option as an "executory contract."4 Some suggestions that have been advanced to take care of this problem have been to either place a liquidated damages clause in the contract triggered by the optionor's refusal to convey the property, which damages would be measured by the difference between the option price and the value fixed by arbitration or, alternatively, to reimburse the optionee for any expenses incurred during the course of the option if the contract is subsequently disaffirmed.
Purchase Contracts and Leases
The most common methods of acquiring mineral exploration rights are through either purchase contracts or leases.
Purchase — It is probably most generally felt that an outright sale of property free of any continuing obligation is the most preferable way of obtaining title to mineral ground. This permits the operator to be free of any supervision of the owner and any resultant burdens—financial and otherwise.
[Page 2-5]
Leases — A lease is a grant of a possesory interest in land together with a right of ownership of the minerals when produced. It is a continuing relationship between the mineral operator and the owner of the property, which results in a continuing interest of the owner in the property and inherently results in restrictions being imposed on the mineral operator, particularly as to his ability to decide the appropriate times to commence or discontinue production. There are benefits, however, and one of the most important is that the mineral operator retains a landowner and taxpayer within the community that is the recipient of an economic benefit as a result of the mining activities. This may not be particularly important if the mine is in actual operation because of local employment, but it frequently is of significant assistance in the preliminary development stages because this individual does represent a local voice in favor of development—albeit a voice prejudiced by a pecuniary interest, that may be a much needed persuasive influence.
Joint Operating Agreements
Joint operations5 through partnerships (either general or limited),6 corporations, and joint ventures are becoming more common, particularly in situations where a single landowner owns significant acreage or a land position in an area having good potential and is financially capable of participating in the initial risk capitalization. The original landowner sometimes feels that it may be able to obtain a better return on its ownership by participating in mineral exploitation. The mineral exploration rights acquired in joint operations are usually typified by a "farm in" arrangement whereby a newcomer is required by a landowner, or other explorer who has acquired a land position, to undertake to make contributions of either exploration expertise or funds for the further definitions of a project area, which will be sufficient to either match the initial
[Page 2-6]
contributions of the party that was there first or attach some premium to initial expenditures. Once the members of this joint...
To continue reading
Request your trial