Contracts versus Acts

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 11A
Contracts versus Acts
Michael Hunt
Hunt & Humphry
West Perth

MICHAEL HUNT has practised mining law for over 40 years. He was the senior partner in Perth Western Australia of the major Australian law firm Blake Dawson which he left in 1996 to establish Hunt & Humphry as a specialist project law firm. He has been recognised nationally and internationally as a leading mining lawyer, regularly named as such in legal market surveys, such as the Financial Review's survey of Australia's top lawyers, the IBA's Who's Who Legal - Mining and Asia Law Leading Lawyers. He wrote the book Mining Law in Western Australia (the fourth edition of which was published in 2009), the "Energy and Resources" volume of Halsbury's Laws of Australia and the book Minerals and Petroleum Laws of Australia (which is a comprehensive review of all onshore and offshore petroleum and mining laws throughout Australia). He wrote an article in the Australian Law Journal titled "Principles of a Common Mining Code" which explains issues which should be included in all mining codesMichael is a life member and a former national President of the Australian Mining and Petroleum Law Association. He has advised on proposed resource developments overseas in many countries including Ghana, Tanzania, South Africa, Mauritania, Zambia, Namibia, Eritrea, Indonesia, Philippines, Papua New Guinea, Solomon Islands, Malaysia, China, Thailand, Falkland Islands and Vietnam.

MICHAEL WHUNT BALLB (Hons)

The published topic for this session is:

"Contracts versus Acts: Brazil and Ecuador are among countries that are considering a change from a licensing or permit-based system to a contract-based system for mineral development. This session will highlight the legal and regulatory issues in the transition from one system to the other. This will include lessons learned from other countries such as Indonesia and Pakistan that have made a similar transition."

This is a topic which requires careful analysis.

INTRODUCTION

So far as I am aware, Indonesia is the only country which operates a contract-based system covering all stages of mineral activities, exploration through mining. In Indonesia the Contract of Work has been the initial exploration title and Indonesia did not have a statutory exploration licence regime under its mineral legislation - unlike the situation in Australia and in all countries where I have worked (except Indonesia). Until recently, the Contract of Work has allowed progress from the exploration stage, through feasibility to development and mining.

But Indonesia has recently adopted new mineral legislation which departs from the contract-based system and reverts to a permit-based system.

The processes of development and mining are occasionally facilitated in Australia by contractual development agreements. Development and mining are often facilitated in many other countries (including in most of Africa) by contracts and, like Australia, in those other countries nearly all such contracts are entered into at a later stage - after exploration has been conducted under the mineral legislation's statutory exploration licence or exploration permit. Occasionally in Africa a contract is entered into at the outset before exploration if the investor's view is that sovereign risk requires it. But most often a contract is not negotiated until there is a development in prospect (ie after a feasibility study). In Australia and in all other countries with which I am familiar (except Indonesia) it is a contract which supplements the mineral legislation rather than replaces it.

The topic also mentions Pakistan. My (limited) experience of Pakistan is that it has a mining titles system under federal law and state regulations which may be supplemented by a contract between government and the proponent. I understand a model mineral agreement is presently being drafted. In other words, Pakistan is not (and will not be) like the Indonesian contract-based system of the Contract of Work but will be more like the mineral agreement system in Africa and most other countries.

To round off this introductory analysis of the topic - what is proposed for Brazil and Ecuador?

Are they going to the former Indonesian system (just a contract) or are they adopting the system of mineral agreements which I have just mentioned - retaining the issue of title and

[Page 11A-2]

initial exploration under mineral legislation but having development and mining stages regulated by a contract-based system?

In relation to Ecuador, I understand that under the new mining law passed in 2009, the State issues a title (a formal document equivalent to a concession) which enables the holder to carry out exploration activities. If the exploration and economic evaluation programs are met, the holder of the title has the exclusive right to pass to the mining phase. To carry out activities, the miner must enter into a service contract or exploitation contract.¹

As to Brazil, I understand that the changes to the regulation of exploration and production activities currently being examined by the government will involve competitive public bidding. A model concession agreement will be drafted. It has been claimed that this public bidding process will stimulate the development of mining projects throughout the country.²

I am presently unable to say if the systems in Ecuador and proposed for Brazil are like the Indonesian contract-based system of the Contract of Work or like the mineral agreement system in Africa and most other countries - but I suspect the latter.

The next speaker Senhor Adriano Trinidade is, of course, the expert who can provide the best and most up-to-date information on developments in Brazil.

In my paper I will first examine permit-based systems. Next, I will consider contract-based systems including references to the Contract of Work system in Indonesia, references to the development agreements systems in Africa and most other places and concluding with a reference to the development agreement systems in Western Australia where the agreements are ratified by Act of Parliament.

I hope my paper will set the scene for Senhor Trindade who will discuss Brazil and mention how Brazil proposes to deal with the legal and regulatory issues in the transition from one system to the other.

PERMIT-BASED SYSTEMS

It is easiest for me to start with my home, Western Australia. Its mining industry is a great success story and has been for a very long time. Over 100 years ago Arthur Veatch, an American geologist appointed by President Theodore Roosevelt, made a special study of Australian mining laws in order to make recommendations to the President on amending the mining laws in the United States. In his report he concluded:

The Western Australian mining law is ... the mature enactment of a legislature whose members are entirely chosen by the voters of a great democratic mining State - a State which ranks among the great mining states of the world.³

[Page 11A-3]

Whilst the Western Australian mining law has been totally rewritten since then, I venture to suggest that it still complies with Dr Veatch's noble words - the mature enactment of one of the great mining states of the world.⁴

Being here in Brazil, another of the great mining states of the world, causes me to observe that the fundamental tenet of the Western Australian mining law is "first come, first served" or to express it more legally - priority for grant of a title application is given to the first applicant. There is no competitive bidding. I would urge Brazil to reflect carefully upon its proposal to introduce competitive bidding for mineral tenure. Like Brazil, in Australia we have competitive bidding for petroleum and, like Brazil, it works. But that does not mean it will work for mineral tenure. It is false to equate the situation to competitive bidding for petroleum. The commodities are vastly different both in terms of investment and reward.

Results demonstrate that the Western Australian mining law fulfils its purpose. In 2010 Western Australia's mining industry earned $69 billion with iron ore accounting for $49 billion, gold $8 billion and alumina and nickel each bringing in $4 billion. Mining investment expenditure was $24.5 billion in 2010. Expenditure on mineral exploration was $1.4 billion. The Western Australian Government collected more than $1.9 billion in royalties from mineral producers (which is in addition to the Australian Federal Government collecting taxes on mining company income).

Western Australia is one of the great mineral provinces of the world. It hosts an impressive 540 commercial mineral projects, embracing 968 operating mine sites which produce over 50 different minerals. At 30 June 2010 the total amount of land covered by mineral tenements in force in Western Australia was over 52 million hectares. That is more than twice the size of the United Kingdom (all of England, Scotland, Wales and Northern Ireland).

At 30 June 2010 there were 5297 Exploration Licences and 5764 Mining Leases in force. The target time for approval and grant of mineral tenement applications is 65 business days. In 2010 90% of applications achieved that target.

This proves that a mineral industry working under a permit-based system can be successful. Obviously I acknowledge that there are other more important factors than the permit-based system in determining Western Australia's great mineral success story such as mineral prospectivity and the state of the world economy - but I am convinced that the transparent permit-based system in Western Australia is a major contributing factor to its healthy mining industry.

This paper's topic requires consideration of permit-based systems compared with contract-based systems. So I think it is appropriate to now examine what are the essential elements of a permit-based system...