STRUCTURING ROYALTY AGREEMENTS IN LATIN AMERICA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment (Apr 2019)
CHAPTER 10B
STRUCTURING ROYALTY AGREEMENTS IN LATIN AMERICA
Patricia Núñez
Núñez, Muñoz & Cía. Ltda.
Abogados
Santiago

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PATRICIA NÚÑEZ: University of Chile School of Law (J.D.), 1991. "Pedro N. Montenegro" award as the best student of her generation at Law School. Fulbright Scholarship, 1996. "Master in Laws" (LL.M.) granted by Yale University Law School, Connecticut, USA, 1997. Member of the Council of the Section on Energy, Environment, Natural Resources and Infrastructure Law of the International Bar Association (IBA-SEERIL), (2017-2018); President of IBA-SEERIL, (2015-2016), Vice-President of IBA-SEERIL (2013-2014), Secretary of IBA-SEERIL (2011-2012), Member of the Council of IBA-SEERIL (2009-2010), Chair of the Mining Committee of IBA-SEERIL (2004-2008). Former Chair of the Mining Committee of the International Bar Association (2004-2008). Former Trustee at Large of the RMMLF (2004-2007). Honorary Professor of the Centre for Energy, Petroleum, Mineral Law and Policy of the University of Dundee. Member of the Chilean Bar Association, International Mining Professionals Society Congress of Fellows of the Center for International Legal Studies. Board Member of the Chilean Canadian Chamber of Commerce and Board Member of Transelec. With Claro y Cía (1990-2000), Debevoise &Plimpton, NY, USA (1997-1998). Founding partner of Núñez, Muñoz & Cía. Abogados.

At the time of structuring royalty agreements in Latin American jurisdictions several issues should be considered in order to properly address them in the corresponding agreement.

In this paper, some of such issues are reviewed as they are deemed to be particularly relevant, including:

(i) Mining property tenure systems

(ii) Legal nature of royalty agreements

(iii) Areas of interest provisions

(iv) Bankruptcy

(v) Expropriation

(vi) Governing law

(vii) Dispute resolutions

In the preparation of this paper, and as the author is a lawyer admitted to practice law in Chile, it was requested the assistance of several prominent Latin America lawyers with whom the author is deeply grateful.¹ In cases in which the opinion of mining experts was not obtained or sought, a research was made using specialized publications.

1. Mining property tenure systems

One of the first and most relevant matters at the time of negotiating a royalty agreement on mining rights located in a Latin American country, it is the nature and rights granted by such mining rights in the corresponding jurisdiction.

In general across Latin America title to minerals in the ground is reserved to the State as a matter of constitutional law. Then, it is the State who grants rights on such minerals to private parties, and such rights -which we will call "mining rights"² - vary from State to State.

Also, in general, rights granted by the States to explore and exploit minerals are normally permit-based with the exception of Ecuador, country that has a contract-based system in which a contract must be executed with the Ecuadorean State for exploitation purposes in the case of large scale mining industry projects.³

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With respect to the nature and extent of the mining rights granted by the States, in some jurisdictions such rights can be granted in order to only allow the exploration of minerals and/or in order to allow the exploration and exploitation of minerals (such rights normally called, respectively, mining exploration concessions and mining exploitation concessions).

Also, as general principle, mining rights do not grant rights in rem or real property,⁴ being a notable exception Chile.⁵

Mining rights may be also subject to: (i) time limitations; (ii) reductions in areas; (iii) need to fulfill conditions in order to keep them in good standing (such as filings; works and expenditure requirements; payment of mining patents, etc.)

Therefore, a royalty company needs to review and understand the legal mining tenure that applies in the relevant jurisdiction.

The particularities of the mining tenure system may be addressed in the royalty agreement by imposing obligations to the mining concession holder, such as: (i) keeping in good standing the mining rights; (ii) following up the procedures to "convert" titles from exploration to exploitation mining concessions; (iii) paying mining patents in due time; (iv) fulfilling expenditure requirements, etc.

Finally, it should also be kept in mind that, from time to time, a particular jurisdiction may decide to change its legal mining system, including its mining tenure system. When such a phenomenon occurs, special attention should be given to the fact that mining titles may change and a "substitution" of mining right titles may occur. This was the case of Ecuador when in 2009 its mining law was changed and a "substitution" of mining right titles was provided in the new law.⁶ In such cases, a royalty agreement negotiated with respect to the former titles should be amended in order to include the new mining right titles.

2. Legal nature of royalty agreements

Another relevant aspect to be considered is the legal nature of royalty agreements.

As it has been pointed out "a royalty interest is not itself a mineral interest, but an interest in minerals"⁷ and, in order to understand the rights that such interest in minerals create, it is necessary to review the applicable law.

In common law systems a distinction is made between "personal" property and "real property". In this regard, it has been said that "just as jurisdictions vary in their treatment of mining rights as real

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or personal property, they also vary in their approach to classifying mineral royalties as real or personal property. A royalty that is considered to be a "real property" interest is an interest in the land itself. A royalty classified as "personal property" is merely a contractual obligation between parties".⁸

Similarly, in civil law countries a distinction is made between rights "in rem" and rights "in personam".⁹ Rights "in rem" are those rights in the assets -considered themselves- and rights in "personam" are contractual rights. In civil law countries, rights in rem are created by the law and, therefore, parties cannot create rights in rem no matter how much language in such regard is included in a particular agreement.

Several jurisdictions within the United States consider royalties to be real property and, therefore, running with the land;¹⁰ however, in most Latin American jurisdictions...