Introduction

This second edition of The Guide to Mining Arbitrations provides some new chapters and important updates to most of the chapters contained in the 2019 edition of the Guide. Notable new inclusions are chapters titled ‘The Contribution of Canadian Law to International Mining Arbitration’^[2] and ‘The Role of Experts in Mining Arbitration’.

The introductory comments below remain largely unchanged from the 2019 edition, reflecting the authors’ view that the trends identified and discussed below remain apposite to this update. However, a number of decisions have since been rendered in mining-related arbitration cases, there have been changes to domestic mining codes, and amendments to investment laws are under consideration in several countries. More recently, one can observe a series of new mining-related arbitration cases against sovereign states, notably in sub-Saharan Africa, and the authors are aware of pending cases brought under long-term supply agreements where disruption to supply chains caused by the coronavirus pandemic will test the application of force majeure provisions and take-or-pay obligations.^[3] The outcome of these pending cases and changes to domestic laws will no doubt add to the corpus of lex mineralia over the next few years.

The fact remains that over the past decade, the mining and metals sector has emerged as one of the main users of international arbitration. An increasing global demand for metals and minerals has driven foreign direct investment and the need for complex agreements and arrangements to protect those investments. But the internationalised nature of the mining industry, its intrinsic complexity and its vulnerability to highly specific business risks also mean that the risk of disputes is ever present. The Guide to Mining Arbitration focuses on the key business risks and how they translate into disputes and seeks to provide practical guidance to arbitration practitioners and users to help them navigate and resolve such disputes.

The mining industry features complex, capital-intensive transactions and projects, frequently involving multiple jurisdictions and a mix of private and public parties. Mining projects are usually long-term in nature and highly sensitive to political and regulatory change. They are often undertaken in emerging economies and have a significant impact on the environment and the socio-economic development of surrounding communities. In that sense, there are strong similarities with the energy sector; the breadth and scale of mining and energy-related disputes is similar.^[4] It is therefore unsurprising that international arbitration is the dispute resolution mechanism of choice for both energy and mining disputes. However, mining also differs from the energy sector in certain fundamental ways.

With the energy transition towards renewable sources now well under way, certain commentators predict a gradual decline of the oil and gas industry over the next two decades. The accuracy of these forecasts can be debated. However, there is general agreement that a sustained decline in significant oil and gas investments will ultimately result in fewer arbitration disputes in the sector or these disputes becoming less significant.

Mining, on the other hand, plays a central role in the transition towards renewable energy sources. Copper is used to conduct electricity in virtually every application involving electrical power. Cobalt, lithium and zinc are used to manufacture the sophisticated batteries used to power electric vehicles and portable electronic devices. Silicon (itself derived from various minerals) is used to produce solar panels. Rare and precious metals are essential components in the manufacturing of electronic and technological products. While metal and mineral prices fluctuate in response to conjectural changes, there is a broad consensus that long-term demand for certain strategic metals will continue to grow. The resulting growth in mining investments and transactions, combined with the unique risks associated with the sector, are likely to result in a continuing increase in the number of mining arbitrations over the next decade.

The remainder of this introduction provides a brief overview of the key developments addressed in Parts I to III of this Guide.

Key business risks facing the mining sector

While the risks associated with a mining project can be numerous, these risks do not all have the same propensity to result in disputes being referred to arbitration. In the very early stages of a project, geological or exploration risks are particularly acute since the anticipated mineral resources may not meet expectations or be economically exploitable. While exploration risk constitutes the single largest risk faced by mining exploration companies around the world, it does not generally feature as a major area of contention between mining companies and other stakeholders. Conversely, political, social and environmental risks more readily materialise into mining disputes given their general impact on the viability and profitability of a given project.

Political and regulatory risks

Mining projects are more exposed to regulatory and political risk than most other commercial transactions. Mining projects commonly require the initial and ongoing cooperation of the state or of a state-owned entity, as mining rights are usually granted by the state in the form of a licence or permit enabling it to exert control over the mineral resources in its territory. Consequently, the stability of mining rights and the political and institutional landscape of the host country will impact the mining company’s ability to obtain financing and the general viability and profitability of the project. Because mining projects are subject to intense political and regulatory risks, they also need to promise exceptionally high returns to get off the ground. A mining project will usually only be economically viable in the long term if the legal and fiscal treatment of the project is not altered by unplanned state interference. In this context, the action or inaction of a host government is one of the key risks facing foreign investors in the mining sector. Mining projects require significant upfront investments, which can only be recouped over an extended period. In practical terms, this means that once investors commit large amounts of capital to a project, the bargaining power tends to shift to the host government as the investors have no way to relocate their assets abroad and will generally need years or decades to recoup their investments. This situation has been described as the ‘obsolescing bargain’ and explains in large part why mining projects are so sensitive to political and regulatory risks.^[5]

Another factor explaining the sensitivity of mining projects to regulatory risk relates to the significant volatility of metals and minerals prices. Significant price changes may incentivise states to move opportunistically to renegotiate mining contracts or to change regulatory and fiscal terms. For instance, sharp price increases are frequently accompanied by host states seeking to capture a greater share of the ‘resource rent’ emanating from mining projects. Conversely, sharp decreases in prices may cause the host state to increase taxes and royalties to compensate for a decrease in gross mining revenues.

Some commentators have described the efforts of host states to increase their degree of control over natural resources located in their territory as ‘resource nationalism’. These efforts often entail serious adverse consequences for mining companies, including the withdrawal or non-renewal of mining licences, changes in fiscal or environmental regulation (that significantly impact profitability), national participation requirements or forced renegotiation of contracts and even, in extreme circumstances, the direct and indirect expropriation of their assets. Unsurprisingly, these situations have the potential to give rise to significant arbitration disputes between host states and mining investors.

This is not to say, however, that host states should be prevented from regulating their mining sectors. Host states will generally have a duty to ensure that the population benefits adequately from the extraction of non-renewable natural resources in the country. Human rights, damage to the environment, climate change and social welfare are all legitimate concerns that extractive industries have in the past sometimes ignored. Most mining companies are private, commercial ventures whose primary purpose is to generate a profit for their shareholders. While most mining companies today are mindful of these concerns and committed to addressing them proactively, they are not necessarily best positioned to do so, which makes it necessary for host states to step in and enact appropriate legislation to protect the long-term interests of their populations. Such developments are noted, for example, in the update to the ‘Mining Arbitration in Africa’ chapter.

However, states must be mindful to exercise their regulatory and enforcement prerogatives in a manner that is not unduly detrimental to the long-term viability of mining projects located in their territory. Inconsistent or unpredictable changes in regulation, or regulation motivated primarily by political concerns, have potentially devastating consequences on mining projects. This is why mining companies often seek to guarantee the stability of the applicable legal and fiscal regimes over the expected lifespan of their operations. Stabilisation strategies present significant practical advantages for mining companies by deterring adverse governmental action or by insulating mining projects from the impact of these actions. Stabilisation provisions also encourage the negotiated resolution of disputes by offering an incentive for the state to engage in constructive negotiations rather than act unilaterally. In that sense, effective stabilisation strategies will prevent disputes from occurring or, at the very least, help balance the parties’ respective situations and arguments if a dispute proceeds to arbitration.

Stabilisation can take many forms.^[6] Most often, the parties will seek to manage the allocation of risks by either directly or indirectly ‘freezing’ the regulatory and fiscal framework applicable to a mining project for a set period or for the lifespan of that project (freezing clauses), or by providing for the renegotiation and adaptation of existing financial arrangements between a mining investor and a state or a national resources company of that state (adaptation clauses). An earlier form of stabilisation sought effectively to prevent the state from changing relevant laws during a defined period (intangibility clauses). However, this form of stabilisation is less common nowadays, as it is considered excessively restrictive and difficult to enforce in practice.

Freezing and adaptation clauses tend to be more prevalent. Arguably, they strike a fairer balance between investors’ right to protect their investment and states’ ‘right to regulate’, which is an essential component of their duty to protect the long-term welfare of their populations. Freezing clauses will not prevent states from changing their laws. Instead, they will ensure that the previous legal or fiscal regime continues to apply to certain projects for a set period. Adaptation clauses are even more deferential to the states’ ‘right to regulate’. They do not prevent the host state from changing the law but prescribe a negotiation process to seek to restore the economic equilibrium contemplated by the parties before the change of law. The enforceability of these clauses has been debated as some jurisdictions typically do not uphold an ‘agreement to agree’. However, to the extent the clause simply constitutes an obligation to negotiate, it is likely to be valid, but must be supported by a dispute resolution procedure that can impose a binding solution on the parties.

Stabilisation mechanisms can derive from statutory or treaty provisions, or from contractual arrangements between host states (or state-owned resource companies) and mining companies. However, to be effective, even contractual stabilisation clauses should be supported by an appropriate governing law clause to ensure that local laws cannot be called upon to challenge the validity of the stabilisation clause itself and that the state agrees to refer any dispute over the adaptation of a mining contract to arbitration or to another independent dispute resolution mechanism. These clauses benefit from a presumption of validity in front of arbitral tribunals, but arbitrators still tend to interpret them narrowly, given their potential to encroach on the states’ right to legislate.

Environmental and social risks

Environmental and social risks also constitute major issues facing mining projects today, regardless of where these projects are located. Environmental and social risks are often considered together as forming part of the broader concept of a ‘social licence to operate’. This refers to the need for the owners and operators of natural resources projects to seek acceptance from local communities when developing and operating a mine. This licence does not refer to a specific permit or a governmental authorisation, but rather to a general level of community support and acceptance that can only be obtained through genuine communication with and regard for local communities. Failure to obtain this acceptance may lead to significant conflicts with local communities and stakeholders, which may ultimately threaten the viability of a mining project. In their 2020 mining survey, Ernst & Young identified the issue of obtaining a social licence to operate as the most significant risk facing the mining industry today.^[7]

The two leading international instruments and standards on the issue of the social licence to operate, ILO 169 and UNDRIP, recognise a state’s duty to conduct consultations and obtain free, prior and informed consent from indigenous peoples when their rights may be affected. While these rules applicable to indigenous peoples do not apply ipso facto to all local communities surrounding mining projects, they have in turn encouraged the articulation of international guidance and standards recommending that companies take proactive steps to obtain consent from local communities.^[8]

The difficulty of securing a long-term social licence to operate – and the potential for resulting conflicts – is particularly acute in emerging economies, where there can be a stark contrast between the wealth created by a mining project and the standard of living in the surrounding communities. This may lead to an expectation that mining companies should take part in community development and infrastructure projects. In some remote and underdeveloped communities, mining companies sometimes end up providing basic services usually provided by the state, such as access to water and electricity, education, healthcare, and sometimes even policing and security.

While it is certainly important for mining companies to contribute to the development of surrounding communities, there are some risks for them in performing roles generally associated with states. As businesses, mining companies are not well equipped to perform quasi-regalian functions. Moreover, local communities may come to assess the impact of mining companies based on how well they provide these services (instead of on the basis of their operational and environmental performance, and their contribution to the overall economy and public finances of the host country). This creates a unique opportunity for dissatisfaction and conflicts, which may escalate rapidly and threaten the viability or profitability of the relevant mining projects.

As local communities are not party to arbitration agreements with mining companies, disputes involving social issues often arise in investor–state arbitrations when the consequences of local unrest are considered. Social unrest can put pressure on governments to intervene, through the exercise of their regulatory or enforcement powers, to address the underlying issues. Respondent states invoke social arguments when raising defences or counterclaims, notably by asserting that the investors’ actions were the cause of, or at the very least, contributed to the unrest and conflict. While to date these arguments have had limited success in causing a full dismissal of investors’ claims, they have sometimes led tribunals to reduce the amount of compensation awarded to mining investors.^[9]

In a similar vein, the concept of a ‘licence to operate’ is intrinsically linked to environmental risks, which are particularly salient in the mining industry. Mining projects will generally have a substantial footprint and impact on the environment. Failure to adequately address the environmental and sustainability concerns associated with mining can lead to very serious consequences, which is why most developed mining jurisdictions have adopted comprehensive environmental regulations. This falls squarely within a state’s prerogative to enact and enforce appropriate regulations to ensure the long-term protection of the environment and population. In some cases, the enactment or enforcement of these regulations may give rise to treaty claims against host states, as was the case in a series of recent mining arbitration cases.^[10]

States are also increasingly willing to assert counterclaims for environmental damage in the context of investment claims started by oil and gas or mining investors.^[11] These counterclaims have been of limited success so far because of jurisdictional and admissibility limitations, as they are most often not expressly contemplated by treaties and the practice of arbitral tribunals in this regard has been rather restrictive. However, the more recent generation of investment treaties often provides for significant environmental and social protections. Arbitral tribunals have also recently showed an increased willingness to consider environmental and social issues when deciding investment treaty or commercial claims.

Difficulty of valuing non-producing mineral properties

A key feature of early-stage mining projects is the difficulty of ascribing a value to them before they enter production. Unlike oil and gas exploration, where sophisticated imaging techniques and well-testing can provide extensive information about an entire hydrocarbons reservoir, it is extremely difficult to predict the geological and physical properties of a mineral deposit without conducting an extensive (and costly) drilling, testing and engineering campaign. As a result, it is very difficult to ascribe a precise value to an early-stage mining project. This difficulty is in large part a function of the considerable geological risk – or exploration risk – present in mining projects. While this geological risk does not necessarily translate into specific arbitration disputes, it has a considerable impact on the determination of damages in arbitrations concerning early-stage mining projects.

The valuation of pre-operational stage mining projects often proves difficult and contentious. While operational-stage projects can be valued based on the income they produce (using a discounted cash flow (DCF) methodology), this may not be feasible when a project is years away from production. This is not to say, however, that it is not possible to ascribe a value to early-stage projects in the context of commercial or investment arbitration disputes. Arbitral tribunals are becoming increasingly sophisticated in their understanding of how the life cycle of a mining project may impact the choice of methods used to value these projects, and how these methods are applied. These tribunals are guided by the emergence of transnational rules and technical standards on the valuation of mineral properties led by industry bodies – the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) in Canada and the Australasian Joint Ore Reserves Committee (JORC) in Australia, for example. An updated discussion of these issues and recent case law is the subject of the ‘Valuation of Non-Producing Mineral Properties’ chapter.

Traditionally, for early-stage exploration projects presenting acute risk profiles, tribunals have tended to rely on cost-based approaches to valuation, which simply aim to compensate mining investors for the costs sunk into the project. For more advanced non-producing projects, tribunals would often follow market-based approaches. Tribunals have been increasingly willing to adopt the income-based approach (using the DCF methodology) to grant compensation reflecting the future profit-making potential of a project once it has reached a more mature phase and risks are more suitably managed (usually once a feasibility study has been completed).^[12] At this stage, the DCF method is considered to be the most suitable as it takes into account expected returns while applying an appropriate discount rate to cater for risks and uncertainty.

Risks existing under long-term offtake or royalty agreements

The risks associated with mining are not concentrated only in the upstream (exploration and production) sector. The refining and sale of metals and minerals (what is generally referred to as downstream) also involve considerable risks. Price risk will often be considered by parties to long-term offtake or royalty agreements, as it has a direct impact on their respective ability to perform their obligations over extended periods.

Particularly vivid examples of ‘downstream’ disputes arise in the context of long-term, complex agreements and involve arbitrations relating to long-term ‘offtake’ agreements or to other royalty or profit-sharing arrangements between a mining company and third parties having an economic interest in the production of one or more mining projects.^[13] Shifts in market conditions and a sharply volatile pricing environment over the past few years have put pressure on producers and purchasers, sometimes leading them to renege on their obligations. This has led to an increase in disputes in relation to various aspects of these contracts including pricing, supply and volume, hardship, royalties and profit-sharing, quality and transport.

Pricing disputes tend to arise when a specific benchmark or index ceases to exist, creating scope for disagreement on the new pricing method to adopt or when a price adaptation or review clause is triggered. This brings into sharp focus the benefit of including prescriptive criteria in pricing clauses when negotiating long-term agreements to assist arbitrators in resolving disputes. Significant changes in economic conditions, leading to sharp variations in the price of certain metals or minerals, may also create situations where a party is no longer able to perform its obligations economically. This will often lead to price reviews and arbitration procedures, sometimes accompanied by claims of hardship or force majeure. Similarly, disagreements may surface around the application of a calculation formula under royalty and profit-sharing arrangements or when the contractual formula no longer reflects the prevailing market conditions. These circumstances all create a fertile ground for arbitration. Great care should therefore be taken when drafting these agreements to ensure pricing clauses in particular are robustly and precisely constructed.

Volume and quality disputes are also on the rise since, in a climate of pricing instability, volume commitments may be hard to comply with and the market value of certain metal or mineral products may shift dramatically. Arbitration is, again, the dispute resolution mechanism of choice to address the wide range of issues that emerge, which tends to require specialised knowledge on the part of counsel and arbitrators involved.

Select substantive principles applicable to mining arbitrations

The rapid growth of mining arbitration worldwide has been accompanied by the emergence and ongoing development of substantive principles applicable to mining disputes. These principles emanate from a wide range of sources, from domestic case law and international instruments to arbitral awards and industry standards.

Resource-rich jurisdictions such as Australia and Canada have emerged as global mining hubs, and their courts have played an outsize role in shaping some of the key principles applicable to mining disputes, which have in turn informed the views of international arbitration tribunals when faced with similar fact patterns and issues.^[14] This is owing to the mature and active mining industries that have grown in these jurisdictions, and the development of sophisticated capital markets allowing mining ventures to obtain financing. Australia and Canada concentrate a critical mass of sophisticated investors and professionals with a deep well of mining experience, which explains why most junior mining companies today are incorporated and listed in either Canada or Australia. Most of these Australian or Canadian mining companies will invest in projects abroad, thus contributing to the diffusion of Australian and Canadian industry and legal standards worldwide. Reflecting on developments and procedures in these countries can give practitioners a useful insight into key matters of concern in international mining arbitrations.

For instance, many trends in mining arbitration in Australia, such as the increasing reliance on expert determination for technical issues and the express choice of arbitration as a dispute resolution mechanism in certain statutes, have been echoed on a global scale. Similarly, the Australasian Code for Reporting Exploration Results developed by JORC (the JORC Code) has proved to be an influential professional code of practice setting minimum standards for public reporting of minerals, exploration results, mineral resources and reserves.^[15]

The Guidelines developed by the Canada Institute of Mining Special Committee on Valuation of Mineral Properties (CIMVAL) serve a similar purpose. Provisions in mining agreements may often refer to standards or concepts enshrined in the JORC Code and CIMVAL Guidelines. These concepts (e.g., those of mineral ‘resources’ and ‘reserves’) are very often used when quantifying damages in commercial or investment arbitration.

In this context, economic experts have a crucial role to play in assisting arbitrators to navigate this complex territory.^[16] They play a critical role in the valuation of projects, the calculation of damages, and the identification of the precise economic impact of various measures and actions. This ongoing assistance will help contribute to the long-term construction of substantive financial principles and tools, and a transnational body of substantive rules applicable to international mining disputes.

International bodies such as the Organisation for Economic Co-operation and Development (OECD), the World Bank and the United Nations have also contributed to the development of transnational principles applicable to the mining sector, which are directly relevant to the arbitration of mining disputes. Even if these principles are not necessarily reflected in domestic legislation, they play a key role in the mining industry and serve as a benchmark for international industry practice. Compliance with the OECD and World Bank principles is often a prerequisite to obtaining financing for mining projects in emerging jurisdictions. Other non-governmental bodies such as the Columbia Center on Sustainable Investment have sought to establish and promote a corpus of knowledge on the issues that arise in relation to extractive industries.

Another example of the emergence of transnational principles applicable to the mining industry concerns the interplay between business and human rights.^[17] Human rights are intrinsically relevant to mining, given the outsize economic and socio-environmental impact of the mining sector today. Awareness of these issues is growing, influenced in large part by the development of non-binding international standards such as the UN Guiding Principles on Business and Human Rights. The influence of these standards has resulted in the enactment of local laws and regulations that impose mandatory due diligence, reporting and transparency requirements on businesses (including in the mining sector).

For the time being, arbitration is not considered a particularly viable forum for the settlement of human rights disputes, as victims of human rights abuses are generally not party to arbitration agreements with the perpetrator of alleged human rights violations. However, human rights arguments may become more prevalent in the future as international standards become increasingly sophisticated and states begin to reference human rights in their investment treaties, creating binding legal obligations, and a set of specialised arbitral rules are developed to deal with human rights disputes.

Regional perspectives on mining arbitration

While mining projects worldwide are all exposed – to varying degrees – to the key risks outlined above, these risks tend to materialise differently depending on where the projects are located.

Over the past few years, several African countries have taken steps to significantly increase taxes and royalties so as to increase their control over mining projects and the financial benefits that can be derived from them.^[18] Mining reforms on the African continent have also involved broader changes in the regulatory, environmental and trade regimes applicable to mining projects. These regulatory changes have caused some international mining companies to commence arbitration proceedings against these states, on the basis of mining conventions or investment treaties.

A similar picture is emerging in Asia-Pacific where some governments are moving to assert greater control over the natural resources in their territory.^[19] In addition to tax or royalty increases, some mining countries in Asia-Pacific have introduced regulations or made policy decisions to strengthen environmental protection. This is the case, for instance, in the Philippines and Indonesia. These challenges may lead to an increase in the number of arbitration cases involving mining projects located in the region.

A different picture transpires in Central Asia, which has emerged over the past decades as one of the most active mining regions in the world. Several countries have recently reformed their mineral tenure and mining laws, to simplify the applicable procedures and align their mining regimes with international standards.^[20] Some of these new mining laws offer substantive protections similar to those typically available in modern international agreements and access to international arbitration to resolve disputes between mining permit holders and host governments.

Future developments in mining arbitration

Over the past decade, commercial and investment treaty arbitration tribunals have addressed many of the issues and risks analysed in the following sections. The increasing recognition of the breadth, complexity and specificity of the mining industry form a common thread in arbitral decisions concerning mining projects and transactions. Two main conclusions emerge.

First, parties and arbitral tribunals refer increasingly consistently to a growing body of substantive principles specific to mining, which have emerged from previous arbitral decisions, arbitration practice, international law and industry standards. The development of this lex mineralia is still at an early stage, but it is expected to grow considerably over the next decade, as the number of mining arbitration cases continues to grow and the current push towards increased transparency makes them more readily accessible.^[21]

Second, and relatedly, a small but growing number of arbitration practitioners – counsel, arbitrators, and quantum and industry experts – have become particularly adept at understanding and navigating the specific challenges facing the mining industry. The increasingly complex nature of the mining industry and, by extension, of mining disputes has exacerbated this trend. This has been described as the emergence of a specialised ‘mining arbitration bar’, akin to the somewhat larger communities of arbitration practitioners specialising in construction or energy disputes.

Footnotes