CHAPTER 6 INTERNATIONAL ACQUISITIONS

• Jurisdiction: United States

Mergers and Acquisitions of Natural Resources Companies
(Nov 1994)
CHAPTER 6
INTERNATIONAL ACQUISITIONS
R. Stuart Angus
Smith, Lyons, Torrance, Stevenson & Mayer
Vancouver, British Columbia

1. Introduction

This paper on international acquisitions offers a view on the current international scene with a particular focus on Latin America and the use of a corporate structure as opposed to a co-ownership arrangement for the acquisition and operation of foreign mineral properties.

One might ask what more can be written on this topic today following the International Resources Law Institute which was sponsored by the Foundation and International Bar Association Section on Energy and Natural Resources Law in February 1991 and the Institute on International Oil, Gas and Mining Development in Latin America sponsored by the Foundation and the American Bar Association in April 1994. Recent articles, such as Mr. Armstrong's paper,¹ provide an excellent checklist on the due diligence required in an international acquisition. A number of papers provide interesting comparative studies on the different legal regimes encountered in an international acquisition.² These are all worthy reference materials. What I hope to add is an insight into the way the hard rock exploration and development business is changing and why.

It is clear that the globalization of the hard rock exploration and development business has continued at an accelerating rate. We all ought to be cautious about operating in foreign territory. Our job, whether as legal counsel, exploration and development executive, equity dealer, or lender is to minimize the additional risks of doing business in foreign jurisdictions. In spite of the additional risks involved, globalization has attracted new players who are by nature risk takers and who are changing the way the business is conducted.

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There is no right or wrong way to conduct business in foreign jurisdictions; rather, assuming that there is good geologic potential, it is a process of balancing many different risk factors including the following:

— political, foreign exchange and repatriation of capital risks;

— levels of equity participation and control;

— taxation schemes;

— security of tenure;

— choice of business partners, be they government or quasigovernment entities, domestic producers or other local companies or individuals;

— language differences; and

— different legal systems;

with a view to an early resolution of the issues so as not to miss the "early play" but also recognizing that some answers may not be required until a much later stage and that significant differences exist between the acquisition of projects and a plan to carry out grass roots exploration.

2. Overview

While the mining business has always been an international business, there has been an ebb and a flow to the international aspects of it. For a number of reasons, it is now in full flow again. I have in mind the newly independent states of the former Soviet Union seeking development of their mineral wealth as a means of gaining quicker access to hard currency, the rapid commercialization of China, and the efforts of many governments worldwide to promote mineral exploration and development. Particularly in Latin America, those efforts include:

(a) tax reform resulting generally in lower rates of tax and the removal of tax measures which discriminated in favour of domestic entities;

(b) the removal of authorizations required to make a foreign investment in mining activities;

(c) the removal of restrictions impeding the repatriation of capital investments or transfers of profits abroad; and

(d) the modernization of mining codes, including the removal of restrictions on foreign ownership of mining properties.

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North American mining companies have recognized the opportunities available to them in foreign investment markets as a result of changes such as those set out above and are making substantial investments outside North America. Some may say that the rush to invest abroad is due to the apparent lack of sympathy for mining activities in North America. I would argue that it is the better opportunities which are drawing these investments to other countries. The fact is that this is where the action is today and probably will be for some time to come.

This heightened interest in international mining opportunities has also been fuelled by the activities of junior mining companies in South and Central America, Mexico, and Africa. I define a "junior mining company" as a company that obtains a significant portion of its funding from equity offerings to advance its business plan. You might ask why a largely American audience would...