CHAPTER 9 COMMINGLING AND UNITIZATION PROVISIONS IN MINING AGREEMENTS
| Jurisdiction | United States |
(May 1991)
COMMINGLING AND UNITIZATION PROVISIONS IN MINING AGREEMENTS
Franco-Nevada Mining Corporation, Inc.
Euro-Nevada Mining Corporation, Inc.
Reno, Nevada
TABLE OF CONTENTS
I. INTRODUCTION
A. Just Exactly What Are Commingling, Unitization And Pooling?
1. Commingling.
2. Unitization.
B. Reasons For Commingling.
C. Reasons For Unitization Of Mining Properties.
D. The Distinction Between Commingling And Utilization.
E. Benefits And Detriments Of Commingling And Unitization.
F. Application Of The Law Of Fair Dealing.
G. Application Of The Law Of Accounting.
II. BASIS FOR NEED OF COMMINGLING AND UNITIZATION AGREEMENTS—DOCTRINE OF CONFUSION OF GOODS
III. THE LAW OF COMMINGLING: GENERAL OVERVIEW
A. Reference Materials.
B. The Right To Commingle—Or Is There A Right?
1. The Right To Commingle And The Consequences Of Doing So.
2. No Right To Commingle.
C. Summary Of Law Of Commingling.
IV. THE LAW OF UNITIZATION: GENERAL OVERVIEW
A. Reference Materials.
B. No Unitization Without Authority.
C. Practical Aspects Of Unitization.
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1. Elements Of And Reasons For Unitization.
2. Division of Royalties Within A Unit.
3. Problems Associated With Unitization.
VI. COMMINGLING AND UNITIZATION: THREE ACTUAL CASE STUDIES
A. Fee Lands And A Single Royalty Percentage.
1. General Description Of Land And Boundary Positions.
2. General Description Of Royalty Interests and Commingling Clause.
3. Application Of The Commingling Clause.
4. Summary Of Underground Mine Commingling Operations.
B. Big Gold Surface Mine: Multiple Unpatented Mining Claims And Multiple, Variable Royalties.
1. General Description Of Land And Boundary Positions.
2. General Description Of Royalty Interests And Commingling Agreement.
C. The Unitized Surface Mine: Multiple Unpatented Mining Claims And Fee Lands With Multiple Royalties And An Applicable Unitization Agreement.
1. General Description Of Royalty Interests And Commingling Clause.
2. Unitization Agreement.
3. Royalty Apportionment At The Unitized Surface Mine.
a. Ore Control
b. Mine Operations
c. Apportionment
d. Mill Operations
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VI. VARIOUS TYPES OF COMMINGLING CLAUSES
A. Criteria To Be Observed In Drafting Commingling Clauses.
1. Objectives To Be Served.
2. Factors To Be Considered In Drafting Commingling Clauses.
B. References To Other Criteria.
C. Other Commingling Clauses.
VII. VARIOUS TYPES OF UNITIZATION CLAUSES.
A. Check List Of Customary Provisions.
B. Fletcher Unitization Clause—Governmental Plan
C. Sperling Unitization Clause—Oil and Gas: Surface Acreage Proration.
D. Williams' Unitization Clauses.
E. Other Unitization Agreements.
VIII. CONCLUSION
APPENDIX
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I. INTRODUCTION
As development of mineral properties has turned from small, underground mining of veins and stringers to development of large tracts of widely disseminated mineral deposits, the chances of multiple owners of a single ore deposit have dramatically increased. Thus, although the need for commingling of ore from and unitization of multiple mining tracts has existed throughout the history of mining, modern deposits and mining methods have required the more frequent insertion of commingling and unitization provisions in mining agreements. However, before meaningful commingling and unitization provisions can be drafted, it is necessary to understand both the reasons such provisions are necessary as well as the functions to be performed by those charged with the execution of such provisions. The purpose of this Paper is to provide not so much a discussion and review of the law of commingling and unitization as it is to provide the agreement drafter with the requisite understandings of these underlying functions.
A. Just Exactly What Are Commingling, Unitization And Pooling?
1. Commingling.
Black's Law Dictionary defines commingling as "to put together in one mass".1 In essence then, commingling involves the mixing together of things of generally a like kind so that following the mixture the components may no longer be distinguished as to ownership preceding the commingling.
2. Unitization.
Unitization is generally thought of with reference to oil and gas operations. Williams and Meyers define unitization as "...the joint operation of all or some
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part of a producing reservoir".2 Unitization is described in the American Law of Mining as:
"In a unit, individual lease boundaries disappear as a practical matter; instead leases covering a prospect are considered to form a single unit, the boundaries of which are the exterior boundaries of the exterior leases. Each lessor receives a portion of the production royalty paid for mining anywhere within the unit, not simply for mining on his property."3
The distinction between unitization and another commonly used oil and gas term — "pooling" — was best described by Harold Morgan in his early Paper on unitization in mining properties. Mr. Morgan made the following observation:
"Today, pooling is generally understood to refer to combining or consolidating oil or gas properties for the creation of a one-well drilling or proration unit of a size which can be efficiently drained by the one-well intended to be drilled. Unitization, however, is generally understood to refer to the consolidation or combination of oil and gas leases or other mineral interest in an entire field or common source of supply."4
B. Reasons For Commingling.
Commingling is the result of the principles of practicality and necessity. Commingling of ores in mining operations allows for greater efficiency in and a reduction of the cost of mining and beneficiation of ore in mining and processing operations. By commingling ores of different grades, processing costs are saved and low grade ores,
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otherwise uneconomic, are saved and may be processed. As noted a number of years ago:
"...[I]t is essential to provide for a method of determining the value of the ore in which [each of] the lessor[s] has an interest when it is commingled with other ores. The simplest answer to this, of course, would be to separately process the ore, but this is not usually feasible where the mill is processing ores from other properties. The separate processing or batching of ore in a mill is an expensive proposition and, as a consequence, such a resolution of the problem is not generally acceptable."5
In short, the right to commingle ores from different properties allows for a consolidated mining operation and the blending of different grades and qualities of ore at the mining or processing stage, all permitting a more efficient mining and processing operation.
C. Reasons For Unitization Of Mining Properties.
By unitizing a number of differently owned land tracts, the mining operator gains a substantial efficiency in accounting operations as well as mining and processing operations. Additionally, the mining operator expands the land base which is subject to a single mining operation and a single division of royalties for ore produced from within the unit. Unitization is frequently thought to be an essential element if solution mining techniques are employed. In solution mining operations, the normal application of commingling provisions "...will be extremely difficult, if not impossible, in in situ mining operations since there would be no way to determine with any sort of accuracy from which portion of the ore body the minerals in the pregnant solution were leached."6 Other benefits of unitization of mining properties are the elimination of the need for cross-mining provisions in lease agreements and the allowance of commingling of ores at any stage of mining and processing operations.7
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D. The Distinction Between Commingling And Unitization.
Commingling requires maintenance of individual properties and accounting of production from properties according to individual property borders. In short, commingling does not eliminate the need to account for production from each property in the commingled mass. On the other hand, unitization allows all accounting and operations to be based upon a single percentage division of production from the ultimately commingled mass as the primary function of the applicable royalty interest of each property owner. For example, in a simple unitized mining operation where 60% of production is attributed to one owner whose royalty is 5% of net smelter returns and 40% to another property owner whose royalty interest is 4% of net smelter returns, mining and accounting operations are simplified by the elimination of complicated commingling formulas. In such a situation, the first royalty owner would receive 5% of 60% of net smelter returns and the second royalty owner would receive 4% of 40% of net smelter returns.
E. Benefits And Detriments Of Commingling And Unitization.
Commingling provides some operational benefits to the operator but substantial accounting problems. However, commingling provides little risk to the royalty owner of gaining or losing minerals which result in the payment of royalties. For a thorough discussion of the benefits and detriments of commingling, reference should be made to Richard G. Allen's article "Utilization of Adjacent Properties, Cross-Mining and Commingling".8
Unitization provides substantial operation and accounting benefits to the operator. Unlike commingling, however, unitization provides a greater risk to the royalty owner of gaining or losing minerals which result in the payment of royalties. For a thorough discussion of the benefits and detriments resulting from unitization of mining properties, reference should be made to Mark K. Adams' article "Unitization of Solid Mineral Properties".9 Other benefits are discussed in Harold M. Morgan's article "Unitizing Mining Properties...
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