GM and Stillwater Mining Co. It’s Back on!

30 12 2010

After abruptly dropping a decade-long business relationship with Stillwater Mining Co, the only U.S. platinum group metal (PGM) miner, as part of its bankruptcy restructuring in July 2009, General Motors has renewed its relationship with its palladium supplier. You may remember the controversy sparked by GM’s petition to a federal bankruptcy court to reject the then existing agreement with Stillwater and retain those in effect with Russian and South African suppliers.

As per the recently concluded deal, Stillwater Mining Co will provide palladium to GM for three years based on the market average price at the time of sale. The new agreement has removed the floor and ceiling prices features of the previous contracts. Stillwater Mining Co is also in discussion other automakers including Ford whose current supply agreement will soon be expiring.

As a result of the recovery in the auto sector and increased investor interest in PGMs, palladium performed well in 2010. These factors should keep supporting prices in 2011 as it is suspected that investment demand (such as demand from exchange-traded funds) could push the metal into a supply deficit in the coming year. Moreover, some analysts predict a 15% increase in gross demand. For Q1, Société Générale predicted that palladium would trade at $800 an ounce in average but warned that a correction could be expected as it perceived the metal has over bought.


International Arbitration: Canadian Firms in Troubled Waters

11 06 2010

It seems that lately, Canadian firms have been at the mercy of government’s will to play nice or not. In the last remedy available to protect substantial investments in developing countries’, firms have turned to international arbitration hoping to overturn decisions made by sometimes corrupted domestic courts or abrupt policy shifts.

Africa-First Quantum (TSX: FM, LSE:FQM)

The highest profile case to emerge lately was of course First Quantum whose rights to two mines (Frontier and Lonshi) in the Democratic Republic of Congo were annulled by a court and handed over to a state-owned firm. The Court cancelled a letter giving First Quantum’s the mining rights to the two properties claiming that subsequently to a reform of mining laws, a decree was required to allow First Quantum to exploit the mines. This behaviour from Congolese authorities could be partly explained by the decision of the firm to seek international arbitration in relation to a previous ruling made on its Kolwezi project.

The Kolwezi project is developed by the Kingamyambo Musonoi Tailings SARL (“KMT”), a partnership involving First Quantum (65%), the state-owned Gécamines (12.5%), Industrial Development of South Africa (10%) and the International Finance Corporation (5%). A contract review conducted in September 2009 highlighted contract irregularities and production delays to the project. The review pointed that the constitution of the company resulted of a fraud for which Gécamines and the Mining Registry were seeking compensation of US $7 billion and 5$ billion respectively.

First Quantum explained in a press release that partners in the Kolwezi project were not served and with a proper Notice of Hearing Date for matters related to the Kolwezi project and noted that there were grounds for thinking that the Code of Civil Procedure was not adhered too in the process. The firm began arbitration procedures on February 1, 2010 through the International Chamber of Commerce International Court of Arbitration in Paris which (sadly) does not publish documentation on the case on its web site.

Central America

 Amazingly enough, 61% of the mining cases filed to the International Center for Settlement of Investment Disputes, the most commonly used arbitration court, involved Latin American countries. It seems that Governments have settled previous dilemmas between resource development and environmental protection and have taken swift turns in the latter direction, making some mining projects casualties.   

El Salvador-Pacific Rim (TSE: PMU), a Vancouver-based firm, has seen its El Dorado gold project jeopardized as a result of the government refusing to provide a mining permit for fear of being clobbered by citizens opposing mining. In responding to popular pressure the Government avoided to approve an Environmental Impact Assessment. The company provided its first impact assessment in 2004 and substantially reviewed it, at the Government’s demand until 2006, and then nothing.

 Ironically, it was conveyed in the press that the environmental quality of the project is not the factor preventing the issue of the permit as the final design of the mine is exceeding international standards. The government of then-President Tony Saca acknowledged this by telling the company that there is no technical problem with the mine, only political ones”. Opponents to the project however argue that the measures to mitigate adverse environmental impacts are not sufficient. In response to this stalemate, Pacific Rim has filed for international arbitration.

 Pacific Rim announced in December 2008 their intention to file for arbitration under Dominican Republic-United States-Central America Free Trade Agreement’s (“CAFTA”) investment rules. Pacific Rim can rely on this agreement as it has U.S. subsidiaries operating in El Salvador (PRES and DOREX). The company formally filed for arbitration at the ICSID on April 30, 2009. The hearing of preliminary objections has taken place only recently on May 31st and June 1st 2010. The Government of El Salvador was attempting to get the case dismissed at the outset. Video recordings of the hearing are available here. We are still months away of any substantial developments. Should any newsworthy development arises, you will be made aware.

Similarly to Pacific Rim, Vannessa Ventures, through its subsidiary Industrias Infinito S.A, attempted to obtain an environmental permit for its Cerro Crucitas gold project. The permit it obtained was overturned in 2004 by the Supreme Court of Costa Rica as the permit violated provisions from the constitution guaranteeing the public a healthy environment. The court ordered the state to pay costs, damages and compensation to Vannessa Ventures. The company later on filed for arbitration with the ICSID and is now operating on another name: Infinito Gold Ltd. A bit of browsing has indicated that Infinito Gold has also filed for arbitration regarding the expropriation of its Las Cristinas project in Venezuela. Gracias!

 This was just a quick sightseeing of the international arbitration seen from the mining industry’s perspective. The UN Commission on International Trade Law another international arbitration body, similarly to Chamber of Commerce International Court of Arbitration, does not publish a registry of cases. So this entry is only a sampling of current cases but it does underscore the political and social risks inherent to mining operations.

Mining in Canada: Federal Budget Items for 2010

5 03 2010

Well, with the federal Budget-making season coming to an end, I can finally fill you in on what’s in Budget 2010 for the mining industry as well as resume posting entries on a steadier basis (yes!). There are two important items that have been included in Canada’s Budget for 2010.

First, and of surprise to roughly nobody, is the one-year extension of the Mineral Exploration Tax Credit. This tax measure is intended to help exploration firms raise capital by allowing them to transfer the tax deductions that they would normally be entitled to (but could not necessarily benefit from due to a lack of taxable income) to shareholders in the form of flow-through shares. This extension will provide up to C$55 million in tax relief. This tax credit has been extended from budget to budget since 2000 and mining industry association like PDAC have advocated making it permanent. I’m quite sceptical that this measure has contributed to exploration levels, but who wouldn’t take a tax break?

The second measure is entirely new and targets the regulatory requirements surrounding resource projects in the North. The Throne Speech earlier this month had hinted at those changes and many prominent mining industry associations have been praising this initiative. This Budget item provides the Indian and Northern Affairs Canada with more resource in order to streamline the review process as well as to carry reforms to improve the clarity and certainty of the process. The focus on the North is essentially in recognition of the large areas of land that are yet unmapped in this area and of the growing its growing contribution to the economy.

It’s Friday, I’m off to work. But stay tuned, I’m working on an interesting entry that I will publish very soon.

Mega gold mine: Everything is [almost] sorted!

7 02 2010

Barrick Gold’s Pascua Lama transnational gold mine may soon materialize. This mining project is quite unique. This deposit straddles the border between Chile and Argentina with 75 per cent of the deposit located in Chile and 25 per cent in Argentina at an altitude of over 4,500 meters above sea level.

This project has faced many hurdles, including strong public opposition and lengthy court action, but it seems that the last practical difficulties will soon be solved. As this mining project is the first on its kind, governments had yet to develop the necessary agreements to render it possible. Taxation of profits remained a contentious issue however the governments are reportedly close to reaching a deal.

According to Reuters, Chile and Argentina will be taxing profits depending on which side of the border the gold and silver will come from. The taxation of transborder services (i.e. services provided by individual companies on either side of the border) remains an outstanding issue and discussions are still held on the matter. While government officials have expressed their confidence in reaching an agreement on those last details, fine print of this type could prove intricate.

Another key element in making this transboundary mining project possible was the signing in 1997 of the Chile-Argentina Mining Integration and Complementation Treaty Agreement which was drafted in consideration of more than 20 transboundary deposits identified. The Treaty, which is the first of its kind internationally, allows the exploration and exploitation of both sides of the countries’ borders without restrictions and regulate issues related with labour, environment, health and investment policy. Particular mining projects are governed by Additional Specific Protocols to be established under the Treaty. At present only two Protocols have been drafted, one for Barrick Gold’s Pascua Lama and another one for Xstrata’s El Pachòn.

El Pachòn is a copper deposit entirely located in Argentina but due to its location at only five kilometres of the border is subject to the Treaty. Under current timetable this project would begin construction in 2010 and be commissioned in 2013. As for Pascua Lama, construction began in mid-2009, 15 year after the company first acquired the property leases.

Pascua-Lama has proven and probable reserves of 17.8 million ounces of gold, with 717.6 million ounces of silver and 649.5 million pounds of copper. The mine has an estimated mine life of more than 25 years. The mine will have one of the lowest cost gold mines in the world with an estimated $20-$50 per ounce average costs expected in first full 5 years. The mine will be commissioned in late 2012.