CHAPTER 9 MANAGEMENT OF MINING PROPERTIES (HOW GREEN WAS MY MONEY?)
| Jurisdiction | United States |
(May 1986)
MANAGEMENT OF MINING PROPERTIES (HOW GREEN WAS MY MONEY?)
Lohf & Barnhill, P.C.
Denver, Colorado
I. Introduction.
Throughout the history of the United States, the natural resources industry, and in particular, the mining industry, has been subject to wide fluctuations between prosperity and depression. When you study the history of the American (and for that matter, the world's) mining industry, one fact is apparent. During each downturn in the mining industry, certain individuals and companies are able to survive and favorably place themselves in positions to take advantage of subsequent economic recoveries. The purpose of this paper is to offer some analysis of common problems encountered in the operation of mining properties under economic duress and the threat of impending bankruptcy.
This paper doesn't provide solutions; only suggestions which will hopefully stimulate your thinking and lead to some creative solutions to individual problems.
The very first question you should ask yourself is whether the property — be it a mining operation or an exploration target — is worth keeping? Strangely enough, many, apparently intelligent, people don't address this fundamental issue. Some managers become emotionally attached to a property and lose their objectivity. Other managers feel that so much money has already been spent on a property that the investment is too great to write off. Investing just a "few" dollars more will turn that economically marginal property into a real bonanza. Of course, every company's investment objectives and criteria are different. What may be marginal property for one company may be just right for another. For some pungent observations on today's mining and exploration companies and managers, you should read the "News and Rumors from the Bush" column in Skilling's Mining Review.
If, after solid, realistic economic analysis (and some soul searching), the property is determined to be not worth keeping, walk away as gracefully as you can. Perhaps the property can be farmed out to another company. At any rate, you should disengage as quickly and efficiently as possible, taking into account legal and contractual commitments such as reclamation obligations.
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If the property is worth keeping, then you have other issues to resolve. Your first action should be to determine as soon as possible what your final objectives are. The best goal, of course, is to make a profit despite adverse economic conditions. Another objective would be to achieve one hundred percent ownership of a property, or at least operating control. A more modest goal would be to operate at breakeven until the industry, as a whole, improves. A realistic analysis of a project might lead to the conclusion that the project should be mothballed with minimum holding costs.
Once you establish priorities and goals, the maxim, "Keep your eye on the ball!", should be kept in mind. Don't be distracted by short-term events. Deal with these problems, but don't be waylaid by them. A common fault among managers is a constant focus on short-term results; for example, quarterly reports or even yearly results. There are mines in the United States today which are being mined — "highgraded" might be a better term — with only the short run results being considered. The long-term productivity is irreparably damaged in order to enhance the short-term economic returns. Examples of short-term events are sharp spikes or depressions in oil or gold prices, or unforeseen operational problems. These are significant events, but don't let them distract you from the long-term goals.
Finally, in order to survive, or even prosper in difficult economic conditions, be flexible and nimble. If major events change aspects of your operations, be prepared to change your goals.
II. A Brief Review of the Bankruptcy Code.
Other papers presented at this Special Institute have reviewed the provisions of the Bankruptcy Code, as amended, in great detail. For purposes of this paper, a brief review of the most pertinent sections of the Code is appropriate. There are three sections of the Code which should be kept in mind when dealing with a potentially bankrupt mining operation or organization.
First, Section 365 states that "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." This right to accept or reject an executory contract or unexpired lease is subject to a number of conditions which are outlined in Section 365.1 The impact of this section will be discussed later in this paper as it pertains to individual situations.
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Second, Section 547, "Preferences," concerns the right of the trustee to avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor;2
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;3
(3) made while the debtor was insolvent;4
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider;5
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.6
This section on preferences is very important when you are conducting business with a financially distressed party. For example, buying or trading mining properties, or collecting money owed for the purchase of mineral products.
Section 547 lists several statutory exceptions to the trustee's power to set aside a preferential transfer. The most significant one for purposes of this paper being transfers "made in the ordinary course of business."7 I would argue that the term "made in the ordinary course of business" must be interpreted in light of the usual business practices of the industry in question. In this case, the mineral exploration and mining business.
Since we are primarily concerned with real property interests, you should note that a transfer of real estate occurs when the cash purchase price is paid in full at closing or when a mortgage becomes effective.8
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The third Code section to keep in mind is Section 548, "Fraudulent Transfers". Section 548 allows the trustee to avoid transfers of the debtor's interest in property made either with actual intent to hinder, delay or defraud creditors, or for less than reasonably equivalent value while the debtor is insolvent, or rendered insolvent by the transfer. Transfers subject to avoidance under Section 548 must have been made within one year before filing the bankruptcy petition.9
In short, you may avoid a preferential transfer through the lapse of the 90 day time period, only to find the transfer of property challenged on the basis of a Section 548 fraudulent transfer.
III. The Effect of Bankruptcy Upon Mining Agreements and Operations.
Operating under the threat of bankruptcy can be divided into two general categories. Operating under the possibility of your own bankruptcy or operating under the threat of bankruptcy by others. Because of a lack of control over other parties who are flirting with bankruptcy, that category is perhaps more challenging to deal with.
A. Partnerships and Bankruptcy.
1. General Partnerships.
A general partnership has two major features. First, each general partner has unlimited liability for all debts of the partnership.10 Second, each general partner has the implied authority to bind the partnership as to outsiders by any act within the scope of the usual and ordinary activities of the particular business.11
Section 9(1) of the Uniform Partnership Act ("UPA") states:
"Every partner is an agent of the partnership for the purpose of its businesses, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority."
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In a healthy partnership, this ability of each partner to bind the other partners does not cause major problems. In a weak partnership — one that has a financially unsound partner, for example — the ability of each partner to commit the partnership can cause problems. The personal bankruptcy of one general partner could throw the partnership into a bankruptcy, followed by personal bankruptcies of the other general partner.
2. When is a general partner "bankrupt?"
Section 2 of the Uniform Partnership Act defines "bankrupt" as including "bankrupt under the Federal Bankruptcy Act or insolvent under any state insolvent act." Under Section 31(5) of the Uniform Partnership Act, the "bankruptcy" of a partner causes dissolution of the partnership. Several issues have not been clearly answered within the Bankruptcy Code. For instance, if a partnership attempts to reorganize under the protection of Chapter 11, is this inconsistent with the provision of Section 31(5), UPA, which states that bankruptcy of the partnership dissolves the partnership. According to one author, a dissolved partnership is still eligible for reorganization.12
3. The effects of bankruptcy on a general partnership.
In a mining operation conducted by a partnership, title to the partnership's property is generally held in the partnership name. If one of the general partners goes into bankruptcy, that partner's interest in the partnership is...
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