CHAPTER 9 JUNIOR MINING COMPANIES IN TODAY'S MARKET, PART 2: THE JUNIOR|MAJOR STRUGGLE-NEGOTIATING MINING OPTION AND JOINT VENTURE AGREEMENTS

• Jurisdiction: United States

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 9
JUNIOR MINING COMPANIES IN TODAY'S MARKET, PART 2: THE JUNIOR/MAJOR STRUGGLE-NEGOTIATING MINING OPTION AND JOINT VENTURE AGREEMENTS
Kuno Kafka
International Mineral Land and Contract Advisor
Antofagasta Minerals Canada
Toronto, ON, Canada
Fred R. Pletcher
Partner
Borden Ladner Gervais LLP
Vancouver, BC, Canada
Keenan Hohol
General Counsel
Panamerican Silver Corp.
Vancouver, BC, Canda
Darrell W. Podowski
Partner
Cassels Brock & Blackwell LLP
Vancouver, BC, Canada

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KUNO KAFKA works as international legal counsel for Antofagasta Minerals based in its Toronto office, advising the company in all its international mining deals and activities, with particular emphasis in the America, Australia and Asia regions. Previously he worked for Shearman & Sterling LLP in New York, McMillan LLP in Vancouver, and Rubio Leguia Normand in Lima.

FRED R. PLETCHER is a partner at the Vancouver office of Borden Ladner Gervais LLP and is Chair of that firm's national mining group. He practices in the areas of mining, securities and capital markets, and corporate/commercial law. Fred has received recognition for his expertise in mining law from Chambers Global: The World's Leading Lawyers for Business, The 2015 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada, The Best Lawyers in Canada 2015, The Canadian Legal Lexpert® Directory, Who's Who Legal Canada and the International Who's Who of Mining Lawyers. Fred has served as a Trustee of the Rocky Mountain Mineral Law Foundation, and co-presented at the 2013 RMMLF International Mining and Oil & Gas Special Institute in Cartagena, Columbia. He was co-author with Anthony A. Zoobkoff of "Force Majeure (and other useful French profanities)," 59 Rocky Mt. Min. L. Inst. 17-1, 2013, "ROFR Madness! Rights of First Refusal in Mining and Oil & Gas Transactions," 56 Rocky Mt. Min L. Inst. 4-1, 2010, and "Gotcha! Turning Confidentiality and Standstill Agreements into Gold Mines" 53 Rocky Mt. Min. L. Inst. 28-1 (2007). Fred was International Co-Chair for the 54th Annual Rocky Mountain Mineral Law Institute in Snowmass in 2008, was co-author with Graham H. Scott of "What is a Canadian Junior, eh? Doing Business with Canadian Exploration and Mining Companies" 51 Rocky Mt. Min L. Inst. 16-1 (2005), was Mining Co-Chair for the 50th Annual Rocky Mountain Mineral Law Institute in Vail in 2004, and co-presented the Mining Law Update at the 46th Annual Rocky Mountain Mineral Law Institute in Vancouver in 2000. He has served as an adjunct professor at the University of British Columbia Faculty of Law, is on the editorial board for Carswell's Securities Law and Practice (3rd ed.), and has presented numerous papers on mining and securities law topics at conferences and CLEs. Fred is also a member of the Toronto Stock Exchange Listings Advisory Committee and a director of the Vancouver Symphony Orchestra. Fred holds an LL.M. from Columbia University, an LL.B from the University of Toronto, and an A.B., magna cum laude, from Harvard University. He was called to the British Columbia bar in 1993.

DARRELL W. PODOWSKI is a partner in the Vancouver, British Columbia office of Cassels Brock & Blackwell LLP, and was formerly Corporate Counsel with Teck Resources Limited and formerly an Exploration Geophysicist with Amoco Canada Petroleum Corporation. Mr. Podowski primarily advises mining and other resource companies on their commercial, operations, acquisitions, and corporate finance law requirements in Canada and internationally, where his practice has a focus on Latin America. Mr. Podowski acts for Canadian and international mining companies worldwide, and has extensive experience in negotiating international property earn-in and farm out transactions, royalty agreements, asset purchase and sale transactions, strategic alliances, joint venture transactions, and joint operating agreements, and in addition is well-versed in National Instrument 43-101 issues. Darrell also provides advice in all industries on initial public offerings, private placements, public equity and debt financings, mergers and acquisitions, stock exchange listings, and corporate governance matters. Mr. Podowski has been recognized as the most highly regarded individual in Mining Law in North America in Who's Who Legal 2015, and has been recognized as a leading lawyer by Chambers Global, Chambers Latin America, Canadian Legal Lexpert Directory, Best Lawyers in Canada, Legal 500 Canada, Latin Business Chronicle and Latinvex. He obtained his Bachelor of Science (Geophysics) and his Bachelor of Law from the University of British Columbia, and is a member of, and past Trustee of, the Rocky Mountain Mineral Law Foundation and was called to the British Columbia Bar in 1993.

Introduction

With the recent weakness in global commodity prices, and the inability of many junior mining companies to raise sufficient exploration financing in the capital markets, junior companies are increasingly turning to an option and joint venture model to maintain and advance their mineral properties. In an option and joint venture model, a junior exploration company (the "Junior") will grant an option to another company (usually a more established company with available cash, the "Major") to earn an ownership interest in their mineral property (typically earning a controlling interest in one or more stages) in exchange for the Major agreeing to fund certain minimum expenditures on exploration programs and/or delivering technical reports or achieving technical milestones on such property over a set period of years. Typically, the junior company is carried (i.e., is not required to contribute any funds) for the initial stages and as the project advances there is a turning point where the Junior and the Major start contributing to the project in proportion with their participation interest in the project. An option and joint venture transaction of this nature, however, must be structured and planned out properly, because strict compliance with an option's terms is required to maintain the option in many jurisdictions. If the party earning into the target property is a day late or a dollar short of their earn in obligations, they could lose their right to earn an interest in such property. Therefore adequate time periods need to be provided for, and appropriate cure periods and force majeure provisions should also be included, to guard against a party unfairly losing their right to earn an interest in a property as a result of missed deadlines caused by events that may be beyond their control.

Option and joint venture transactions are attractive to Juniors as they can fund exploration programs on their properties without having to raise their own funds and/or dilute their share capital at the initial stages and, if a publicly listed company, hopefully then see an appreciation of their share price as exploration proceeds. The Junior will try to achieve the following:

• A desire to achieve good results quickly to advance their property and have their share price appreciate in value, and to get to production as quickly as possible so they can be bought out by their Major partner, or sell to a third party;

• Assurance that programs will be completed and properties kept in good standing;

• Assistance with project funding and completion guarantees after the full carry portion of the earn in is completed;

• Receive a technical report on the project before being obligated to fund its proportionate share in the project where such report may facilitate their ability to obtain financing to fund their proportionate share of work programs;

• Minimal dilution;

• Flexibility to sell their interest to any third party.

This model is also attractive for the Major as it enables them to explore early stage promising properties and possibly in jurisdictions in which they are new to, without a large commitment of cash or personnel. The Major will try to achieve the following:

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• Want as much time as possible to earn an interest;

• Retain tight control of programs/budgets to ensure projects developed to their own standards;

• Do not want to cede discretion to the Junior regarding budgets/spending;

• Want as much flexibility as possible with ability to terminate at any time with minimal commitments;

• Do not want tight timelines to deliver products, such as a feasibility study, or to make a development decisions; and

• Want tight transfer restrictions to ensure that they can control as much as possible who their partner will be if the Junior desires to sell its interest at any time.

However, due to these different priorities, financial capabilities and motivations of the Junior and the Major, the entering into one of these relationships inevitably leads to tensions in the negotiation of such option and joint venture agreements. This paper seeks to illustrate the various tension points that typically arise when a Junior and a Major, and their respective legal counsel, sit down to negotiate an option and joint venture model such as this, commencing at the stage when the respective geologists of Major and Junior have consummated a deal in principal. The issues and concepts illustrated in this paper are those that arise in a North American style mineral exploration option and joint venture model between parties with different interests and vantage points. While the issues and concepts discussed in this paper may be common in other jurisdictions (such as Australia), they may not be resolved in the same manner, or with the same result, and such other models may have other tension points that may be more important or relevant in those other jurisdictions.

This paper will discuss those issues that arise in the negotiation of a hypothetical two party option (the "Option") for an early stage mineral exploration property in Peru where...