CHAPTER 8 CONSIDERATIONS IN DRAFTING GOLD LEASES AND DEVELOPMENT AGREEMENTS
| Jurisdiction | United States |
(Jan 1988)
CONSIDERATIONS IN DRAFTING GOLD LEASES AND DEVELOPMENT AGREEMENTS
Hill Cassas deLipkau and Erwin
Reno, Nevada
TABLE OF CONTENTS
Page
1. Introduction
2. Present and Developing Gold Mining Technology
2.1 Heap Leaching
2.2 Application of Geothermal Resources in Heap Leaching Operations
2.3 In Situ Leaching
2.4 Advances in Ore Handling
3. Significant Mining Agreement Clauses
3.1 Identification of Parties and Ownership Interests
3.2 Description of Property
3.3 Grant of Minerals and Mining Rights
3.3.1 Purchase Option
3.3.2 Areas of Interest
3.3.3 Lesser Interests
3.3.4 Water and Geothermal Resources
3.3.5 Cross-Mining, Processing and Stockpiling Rights
3.3.6 Commingling
3.3.7 Unitization
3.3.8 Boundaries and Boundary Ore
3.3.9 Amendment, Relocation and Patent of Unpatented Mining Claims
3.3.10 Retention of "Nonmineral" Rights After Lease Termination
4. Negation or Limitation of Implied Covenants
5. Term
6. Payments
6.1 Payment Method
6.2 Payment Credits
6.3 Liability for Taxes
7. Title Representations and Warranties
8. Encumbrance, Assignment and Sublease of Mining Leases
9. Risk Sharing
10. Intellectual Property Considerations
11. Conclusion
Footnotes 8-41
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1. Introduction
Application of modern bulk mining methods, development of efficient, low cost metal recovery processes, and generally favorable gold prices have allowed operators to mine profitably large, low grade gold deposits once thought economically without prospect or promise. We consider primarily the utilization of open pit mining methods and the cyanide heap leach process.
Gold mining by these methods creates certain operational requirements which compel close attention to the operator's rights and obligations under mine acquisition, development and operating agreements. The operator must have sufficient control and flexibility to develop and operate the mine in an efficient manner. The operator's control and flexibility must be preserved and not overly restricted under the terms of gold financing agreements. The draftsman must consider the possible adverse impacts upon operational control when preparing gold financing agreements and related documents, such as underwriters' agreements and security instruments.
The technological and operational requirements of the mine operator require that the draftsman have a basic knowledge of industry practices.1 Other papers presented at this Institute are intended to help provide that knowledge, but there is no substitute for direct consultation with the operator's technical and financial representatives to assure that all pertinent issues and concerns have been addressed.2
This paper will consider specific provisions of mine acquisition and operating agreements which are mandated by operational needs and the relationship of such provisions with the terms of mine financing agreements. This paper decidedly emphasizes the interests of the mine operator (variously referred to herein as "lessee" or "operator"), not those of the lessor, optionor, vendor or royalty owner who must seek counsel elsewhere.3
In keeping with the Program Committee's admonition that this Institute should focus on practical solutions, this paper is not intended as an in-depth analysis of all legal issues confronted by a party intending to acquire or operate a gold mine.
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Instead, this paper is limited to certain key issues commonly confronted by the operator and discusses proposed solutions.
The proposals presented in this paper are intended to inform the reader of possible solutions to pertinent issues, it being the author's experience that there are no "standard" clauses which will work in each instance. Also, possible technological advances require imagination on part of the draftman to assure that the terms and conditions of the mining agreement are not left in the "technological dust."4 The sample clauses herein are derived from articles, texts, and treatises, as well as from agreements, which, although originally intended to be private between the parties, have been so widely disseminated within the mining industry that they have entered the realm of the "public domain."
2. Present and Developing Gold Mining Technology
Most gold mines placed into production in recent years, particularly in Nevada, the leading gold producing state in the United States, employ the open pit mining method.5 Large-scale open pit mining began in the early part of this century when D. C. Jackling pioneered the Bingham Canyon Mine in Utah.6 Open pit mining for gold is not a recent development. The open pit mining method was employed at the Getchell Mine, Humboldt County, Nevada and the Gold Acres Mine, Lander County, Nevada in the late 1930's and in the 1940's.7 Development of open pit gold mines accelerated after the refinement of the low cost heap leach process which has allowed mining of massive, low grade ore deposits.
The extremely large size of many of these ore deposits, pit slope requirements and the requirement for huge waste storage sites have generated title, surface use and access issues of greater magnitude than those encountered by operators of underground gold mines. The issues confronted by the mine operator utilizing traditional milling and processing methods, for example, acquisition of adequate water supplies and, in the absence of application of dewatering processes, the acquisition of large tailings disposal sites, are encountered by the modern gold miner.8 These and other issues are multiplied in the case of the heap leach operator whose heap leach pads may require sites of acceptable topography covering hundreds of acres.9
In addition to the operational needs of proven gold mining and processing methods, the draftsman must be aware of and consider application of "new" mining and processing technologies. Otherwise the operator will find, as has so often been the case in the mining industry, that technological developments have advanced far beyond the contemplation of the parties and the terms of their mining agreement. Many of the recent technological advances and proposals in gold mining,
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including the heap leach process, have been under study for many years or have been employed successfully in the production of other minerals. Certain of these technologies have not been applied to gold mining except on an experimental, noncommercial basis. A brief discussion of current practices and developing technologies of significance in the drafting of mining agreements follows.
2.1 Heap Leaching.
Heap leaching is one of many leaching processes used for recovery of metals from ores.10 Although the heap leach process has been utilized for many years to recover metals from ores, its application to gold recovery is fairly recent relative to the lengthy history of gold mining.11 Early studies of heap leaching were completed in the 1960s, and the first commercially successful gold heap leaching operation was that of the Carlin Gold Mining Company at Carlin, Nevada.12 Heap leaching is favored for its relatively low capital costs and operating costs, rapid implementation, relative simplicity and environmental safety relative to conventional gold recovery systems.13 Heap leaching is particularly well-suited for low-grade disseminated gold deposits. Further research and extensive operational experience in heap leaching have lead to many technological advances which have improved recovery rates.14
2.2 Application of Geothermal Resources in Heap Leach Operations.
Among the important factors which affect the cyanidation process is the temperature of the leaching solution.15 Recent studies reveal that an increase in the temperature of the cyanide solution will increase the rate of extraction of gold. Also, freezing temperatures can halt operations during winter months. Gold producers have used submersible heaters in solution ponds to maintain solution temperatures above freezing, a difficult task considering winter temperature levels in gold-producing states such as Nevada. More often, operators' inability to maintain adequate solution temperatures has resulted in seasonal operation of many gold mines.16
Recent studies have identified ten active Nevada gold operations which have geothermal resources on or near the mine property.17 The studies suggest that hot water from these geothermal resources may be utilized in heap leach operations to increase solution temperatures thus enhancing gold recovery and preventing solution freezing so as to allow year-round operations. Geothermal water is presently used by Pegasus Gold Corporation at the Florida Canyon Mine in Pershing County, Nevada, and similar use is planned elsewhere.18
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2.3 In Situ Leaching.
In situ leaching of minerals has been used for many years in the mining industry, particularly in the production of uranium.19 In situ leaching is similar to solution mining which has been used commercially for the extraction of salts such as trona, salt and potash. Methods of in situ leaching include: (a) production of salt by dissolution of large, relatively pure deposits by well injection of water into the deposit and recovery of solutions from the same or other wells; (b) leaching of buried ore which has been rubblized in place by application of the lixiviant at the ore top followed by percolation through the ore to underground collection facilities; (c) leaching of non-rubblized deposits of relatively high native permeability by methods similar to enhanced oil recovery "water flooding" techniques whereby the lixiviant is injected under pressure through wells and flows from the high pressure injection wells, through the deposit, to the low pressure areas created by recovery wells; and (d) leaching of non-rubblized deposits of low native permeability by...
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