CHAPTER 9 MINERAL SALES AND PROCESSING AGREEMENTS
| Jurisdiction | United States |
(Mar 1985)
MINERAL SALES AND PROCESSING AGREEMENTS
Amax Metals Group
Greenwich, Connecticut
The emphasis of this paper will be on the practical as well as legal aspects of drafting and interpreting mineral sales and processing agreements. In an effort to limit the broad scope of this paper, I will avoid focusing on those aspects of mineral sales and processing agreements which have been or will be covered in the other papers presented as part of this Institute. Nor will I address agreements pertaining to the common variety minerals such as sand, gravel and stone which are generally sold on a unit of weight basis such as a ton or cubic yard rather than on the basis of their constituent mineral values. Lastly, I will not attempt to cover coal1 , uranium2 or iron ore sales or processing agreements which are outside the scope of my experience.
As an in-house lawyer closely involved with the commercial and operating people who have to live with these agreements, my perspective is, perhaps, somewhat different from that of an attorney retained for the purpose of litigating a particular dispute or examining the adequacy of such agreements in the context of project financing. Naturally, one must anticipate the possibility of a dispute and take reasonable precautions in drafting to avoid ambiguities and conflicts in contract terms. Nevertheless, the object of the in-house lawyer usually is to facilitate the commercial transaction, and to some extent one may (and sometimes must) rely upon the assurance which comes from an established course of dealing with a particular customer.
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Moreover, the industry observes certain customs and practices in daily transactions involving mineral products.3 Therefore, many of such transactions are treated as spot transactions among persons knowledgeable in the industry trade and practices. This leads to abbreviated forms of agreement intended to do not much more than evidence the commercial terms of sale agreed upon between the parties.4 While occasionally these lead to significant disputes, the overwhelming percentage of such agreements pass without notice. Moreover, insistence on negotiating a fifty-page agreement documenting all aspects of these routine transactions is both wasteful and likely to frustrate the majority of such transactions. There are, of course, those transactions of sufficient importance or duration to warrant a more detailed contract.5 In the forms which are appended to this paper, I have tried to include some of each.
A. ORE AND CONCENTRATES SALES AGREEMENTS
While there is a difference between ores and concentrates6 , which to some extent must be reflected in their respective contracts of sale7 , the similarities between the two are much more predominant. Both require further processing. Both are purchased for their constituent metal values, but not all of such mineral values may be recoverable. Generally, both contain other minerals which are regarded as contaminants, which may not only affect the quality of the recovered mineral product but may also complicate the processing required to recover the desired mineral
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values. This leads to a primary axiom applicable to all ore and concentrates agreements, i.e., "Know your product." I will return to this point shortly. First, however, it is necessary to consider some other factors relevant to making the agreement:
1. Parties to the Contract. It is almost too elementary to require mention, but an important factor in entering into a contract is to know with whom you are contracting. This has two facets. First, clearly identify the party with whom you are currently dealing—its name, state of incorporation or organization, and address. Secondly, consider carefully the need to restrict assignment of the contract. While contracts may be made with an agent for an undisclosed principal and often they are made with merchants and others who are neither consumers nor processors, from the point of view of the mine owner or operator, the value of the mineral constituents in ores or concentrates may very well depend upon what is done with them pursuant to the contract. For example, is the mine operator getting full value for all of the recoverable products? This depends upon the process which will be used to recover such products and what the processing facility is willing to pay for the metal values recoverable from its process. Some mills are more sophisticated than others in their ability to recover by-products which may substantially increase the value of the ores. Some copper smelters are capable of recovering precious metals values which others may not be capable of recovering. Some roasting plants are capable of recovering rhenium from molybdenum ores. Many are not. In order to assess the adequacy of the price which is offered for the ores
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or concentrates, one should have a reasonable idea of what valuable metals can be recovered from such ores.
Another factor is risk of loss. This is determined not only by where the parties agree to transfer title and pass risk of loss, but also by the financial solvency of the buyer and the ability of the seller to attach assets in the event of nonpayment. To my experience, rarely, if ever, does an ore or concentrates contract require full payment at the time of delivery. In fact, often the first payment is merely a provisional payment to be followed by a final settlement when all of the constituent metal values are determined by assay. Consider what would happen if a creditor of the buyer files a lien against the ore while it is in the buyer's possession but before payment has been made. If title had passed at the point of delivery to the buyer, the seller is essentially an unsecured creditor, except as other relief may be accorded by statute.8 Even if title had not passed, the seller may not be able to recover the ore ore concentrates if they have been commingled with other ores or concentrates or if the filing required under Article 9 of the Uniform Commercial Code to perfect a security interest has not been made.9
An ore or concentrates sales contract is often not a one-shot affair. A mine operator will continue to produce so long as economic conditions permit and looks for a reliable outlet for the ore or concentrates. In some instances the quantity of ore produced may be small enough to collect and sell on a spot basis from time to time, but often the ore or concentrates contract is
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a longer-term arrangement. Thus, knowledge of the contracting party and its reliability in taking delivery of the ores and concentrates is often as important as the creditworthiness of the buyer. This is particularly true if the buyer is to provide the means of transportation. If the buyer fails to provide the necessary trucks, rail cars or vessels to take delivery of the ores or concentrates, tendering delivery may be a futile gesture except as a preface to litigation. Conversely, if the seller is to deliver the ores or concentrates and the buyer refuses to accept delivery or delays the delivery, the seller may incur additional costs of demurrage or retransporting the ores or concentrates to another location.
Other factors which may be affected by the identity of the buyer or what the buyer intends to do with the purchased ores or concentrates are the mode of transportation which may be available and the type of packaging which may be required. The ability to ship in bulk versus the need to barrel or bag concentrates will be determined by the handling facilities available to the buyer at the processing plant. Timing of payment may also be a consideration. Payment terms are likely to be influenced by the distance such concentrates or ores are to be transported and the time that they will be stored prior to the processing.
From the point of view of the processor who buys ores or concentrates, apart from the problem of determining the seller's title to ores, which will be addressed in Dale Kimball's paper this afternoon, the reliability of its source of supply is often a principal determinant overriding (within limits) even
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considerations of price. The processor who is dealing with a merchant or other intermediary is more subject to interruption of supply than one dealing with the mine owner or operator. A merchant's obligations to deliver ores or concentrates may be excused by a shutdown of its source of supply, even if such shutdown is voluntary on the part of the mine operator, since this is generally beyond the control of the merchant. On the other hand, voluntary shutdown will normally not be an event of force majeure in a contract with the mine owner or operator unless it is specifically negotiated into the contract.10
The merchant may also be bound to accept the sampling and certificates of weights and assays of the mine owner or operator and will pass these certificates of weights and assays on to the processor.11 Consistency and reliability of the sampling techniques and reliability of the weights and assays is a very important consideration to the processor buying ores and concentrates as they directly affect the price to be paid for such ores or concentrates.12 More than one processor has been stung by someone who produced certificates of weights and assays showing mineral values which later could not be verified. If provisional payment has been made on the basis of such certificates and the seller does not possess other unencumbered assets, the buyer may be left with an unsecured claim in bankruptcy.
2. Term. As noted above, a number of sales of ores or concentrates are made on a spot basis with a minimum of formalities.13 The one-year contract for the sale of concentrates is also quite common, although regretably it is currently becoming
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much less available than it has been. Since it is usually between parties who are well...
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