Forsys and GFI Settle amid Wikileaks Intrigue

8 03 2011

In one of my very first entries, I discussed the failed acquisition of Forsys, a Canadian junior with a fully-permitted uranium project in Namibia, by Georges Forest International (GFI), a Belgian firm with questionable business practices. After being temporarily halted by Industry Canada, the transaction was called off due to GFI’s failure to transfer the funds. I speculated on the cause in a subsequent entry.

Both companies have since attempted to collect funds from each other (either as damages or break fee). A settlement has been reached. Forsys will not have to pay damages to GFI although it is unknown, yet likely that it will receive compensation from the Belgian firm. This is still no happy ending for Forsys whose share price is standing below half of the value envisioned by the 2009 deal.

According to a diplomatic cable made available to Wikileaks, Industry Canada halted the transaction under the national security provisions of the Investment Canada Act in 2009. Washington and Ottawa worried that GFI would provide uranium to Iran if it secured Forsys’ mine in Namibia. GFI is alleged to have held discussions with Iranian officials regarding the supply of uranium.


Oh No She Didn’t! Australian PM Announces Carbon Tax.

1 03 2011

Having witnessed the grand debacle of the mineral resource rent tax, a tax increase mused as part of the Henry Review to reduce Australia’s corporate income tax rate and support superannuation, I assumed Australia would be better off with no tax on super profits. The difficulties of administrating such a narrow base and intricate deductions while yielding little revenue formed the basis of my conclusions. I also thought that the Australian Labor Party, having lost significant political capital over tax issues, would move on and focus on other things while the world forgets. Instead the Australian Government announced the introduction of a carbon tax in 2012. Details have not yet been announced but it seems the introduction of the tax will be budget neutral rather than revenue neutral (e.g. the extra revenues from the tax will not be compensated by lower income tax rates). In consideration of this upcoming cash grab, I wonder if stakeholders from the mining sector would rather revert to mineral resource rent tax version 1.0 than having any form of carbon tax. Click here for the sector’s initial thoughts.

Flash News: Major Events

2 02 2011

Less than a year after the Upper Big Branch accident, Massey Energy is set to be acquired by Alpha Natural Resources. Mineweb

Rejoice! The 18-month strike at Vale’s Voisey’s Bay operations is over. Mineweb

The Russians were right. Guinea is seeking to double its share in mining projects to bring it to at least 30 per cent. It is however taking 20% in Rio Tinto, Chinalco and the IFC’s Simandou iron ore project. Mining Weekly

Mongolia is implementing a law regulating nuclear energy. Uranium exploration will begin in 2012 and according to the Prime Minister will be the most ambitious mining venture after the Oyu Tolgoi and Tavan Tolgoi projects. Talking about the later, the bid to develop about half of this coking coal deposit recently wrapped up – 15 bidders have shown interest.

The European Union still très féroce on securing rare earths. Reuters

No Time Wasted!

3 01 2011

Just a few days after his presidency was inaugurated, speculation on how Guinea’s new president, Alpha Conde, will live up to his electoral promise of making mining deals more favourable to the State has already emerged. In his inaugural speech, the new president however stressed the need for political and economic stability and stated that current priorities were to modernize the army and promote good governance.

Russia’s envoy to Africa has already began the diplomatic posturing stating that while “it would be logical for Guinea to demand more favourable terms for the operations of foreign companies” Guinea’s approach should be based on “compromise and in the interests of all sides”. As the country is embarking on a “democratic path”, existing laws should be respected the envoy stressed. It remains to be seen whether Guinea’s approach is more in line with democratic processes or whether it is taking cues from Russia’s Khodorkovsky handbook. As of now, Conde’s first move as President was to purge the higher levels of the civil service and elected officials contacted for comment by Bloomberg News did not comment.

This issue is of importance to Russia as UC Rusal is sourcing 40 per cent of it bauxite from Guinea and has a plan to invest further in the country through its Dian Dian mining project. In 2006, UC Rusal was affected by a decision of the Government to cancel its purchase of the Friguia refinery through obscure court proceedings.

Investment Did Not Dry Up

25 11 2010

According to an entry on International Mining, it seems that Australia is experiencing an important growth in investment in major extractive projects.

Since April 2010, (remember that the Australian Government unveiled its plans to introduce a New Super Profit Tax on May 2, 2010), capital expenditures for the developments of new projects had increased by 21%. It seems this number does not take in account the capital expenditure associated with BHP Billiton and Fortescue’s iron ore expansion plans. Moreover, the Australian Bureau of Statistics survey data indicate capital expenditure in 2010-11 may be around A$54.8 billion. Other encouraging news is that exploration expenditures seem to have remained strong.

All that to say that the uncertainty caused by the announcement and the subsequent national debate, did not prevent firms from taking advantage of the commodities’ boom. Although, one must highlight that instability was perhaps the only harm caused by the projected tax. Following consultations, the mining industry has been successful in lowering the applicable tax rate and narrowing the tax base to which the super profit tax would have applied thereby preventing Armageddon.

Tales of Concensus

8 07 2010

None of those two developments can be considered happy endings, but they’re certainly good compromises. On our plate today: two things. First, with a new PM and a new attitude, Australia seemed to have agreed on the shape of its upcoming new tax on super profits. Second, Vale Inco has finally reached a deal with its workers, after roughly a year-long labour conflict.

Australia New Super Profit Tax

Australia’s new Prime Minister Julia Gillard has agreed to make concessions on the parameters of the new mining tax.  A week after taking over Kevin Rudd as Prime Minister, she agreed to cut the tax rate of the new mining tax to 30% from 40% as well as to increase the threshold at which the rate will kick in. The 10-year government bond rate (currently 5%), plus 7% will be used as threshold. Moreover the tax will apply only on profits from iron ore and coal extraction. As a result the tax will affect only 320 companies instead of 2,500 under the previous version of the tax.  The projects will also be subject to a 25 per cent extraction allowance which will reduce the miners’ taxable income.

 Following the implementation of the last tax reform proposed by the Henry Review, Australia general corporate income tax rate was to be lowered to 28% from 30%. Considering the tax rate applicable to those super profits is only 2% higher than the general rate, I’m unsure whether this change of course can be called a compromise (nor proper tax policy). It’s full on back-pedalling (for re-election’s sake).  The miners call the new version of the tax a “reasonable framework”. 

Greens in the Australian Parliament have however signalled last week that they would not compromise on the rate and that the 40% rate would have to stay no matter what.  The saga may not be over yet.

Vale Inco has an Agreement with its Workers

A tentative five-year labour contract agreement has been reached by Vale Inco and employees of multiple Canadian operations who went on strike last summer over their dissatisfaction with the company’s offer regarding pensions and bonuses tied to the price of nickel. The Union of the Sudbury workers still has to vote on the proposed contract. Agreement by the Sudbury Union would likely lead to a settlement at Vale’s Voisey’s Bay operations in Newfoundland.

Sudbury and Voisey’s Bay operations collectively account for 4 per cent of the global nickel supply. The strike has thus been a major driver in the physical market in the past months. Andy Home, columnist for Reuters’ Metals Insider, suggested that the impact of a return to production to Vale Inco operations would take some time before being felt in the markets. Once the output of operations is increased, roughly 140, 000 tonnes of annualised nickel supply will hit the market. Home expects oversupply around the fourth quarter.

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.