In May, Burford Capital’s Washington Director Jeffery Commission moderated a roundtable discussion directing questions relating to key trends and development in the global mining industry to a panel of industry experts.
Participants were Harry Burnett, partner at King & Spalding, Howard Rosen, Managing Director at the Toronto Secretariat and Brenna J.Y. Scholey, Principal Metallurgist and global disputes coordinator at SLR Consulting (Canada) Ltd.’s Mining Advisory Group.
This roundtable discussion is also published in The Burford Quarterly
Commission: According to a recent Jus Mundi study, the energy transition will require multi-trillion-dollar new global mining investments. What impact will this have on the volume of mining sector disputes, and what types of disputes do you anticipate?
Rosen: With the energy transition necessitating around $1.7 trillion of investment in the global mining sector, we can expect a significant increase in the volume of disputes. As more capital pours in, the complexity of issues associated with these investments will inevitably grow.
Commercial disputes will arise due to disagreements between commercial actors over the terms of contractual obligations in the development of mining and processing facilities. Investor-state disputes will occur because of differences in the interpretation of mining laws and environmental regulations. Further, socio-economic disputes involving local communities, often related to land rights, labor conditions and environmental impact, could add to the number of investor-state disputes as investors fail to gain “social license” in the local community.
Finally, there may also be an increase in investor-state disputes if governments alter regulations during the development of a project or fail to provide expected investment protections.
Scholey: There is huge demand today for new mining investment. China has been investing in the development of mines and the critical metals needed for the energy transition and electric vehicle revolution (e.g., lithium, copper, nickel and cobalt), while much of the western world (businesses and governments) has remained quiet and is largely relying on previous investments. Legislative, industrial and financial forces in the western world are now focusing their attention on the supply and demand of critical metals for the energy transition.
Disputes arise when the goal posts move and there are elements of unpredictability or ambiguity. For example, there are countries where governments have changed their mining, environmental or water laws, which could have significant impact on demand for certain types of commodities. New laws may create significant risk for long-term investment in the mining sector. The extent of the new laws and the impact on foreign investments in the mining sector could lead to potential investor claims if the new laws have any adverse effect on existing or planned investments in a foreign country.
If I were to anticipate the types of mining sector disputes, then these two questions are front of mind from an investment perspective and could trigger a review of the rules and possible claims: One, are the standards of fair and equitable treatment being given to investors? And two, is there discrimination against investors in favor other investors from another country?
If impacts to investors are significant, remedies by way of international arbitration are options to seek compensation for potential damages.
Burnett: The energy transition advanced by the vast majority of western economies will have a profound impact on the mining industry. As Brenna notes in her response, this energy transition is predicated on lithium, copper, nickel, cobalt and other minerals. It is therefore no surprise that countries like Mexico, Chile and Argentina have declared resources like lithium as assets of national interest or just flat out nationalized those assets. However, many of the places where those resources are located lack the capacity or the technical expertise to explore them in a commercially feasible and technologically advanced way.
With more mining activity and exponentially increased investment the tension between mining companies and social and environmental concerns is expected to continue to increase. While, as discussed below, we see nation states adopting legitimate regulation to address these concerns, we can expect that some states will use social and environmental concerns as a means to restrict or limit mining operations beyond these concerns and to the benefit of the state and detriment of investors. These type of government actions will likely trigger investor-state disputes.
Greater demand for minerals will lead to greater investment by mining companies in developing projects, and, as we know, mining projects tend to generate all sorts of commercial disputes with business partners, builders, et cetera. With the substantial impact of the energy transition on the mining industry, we expect a full gamut of mining disputes around the world.
Commission: As a result of the energy transition, lithium development is expanding, with Argentina, Bolivia, Chile and Mexico all seeking to expand lithium mining. Do you foresee more lithium-related disputes in the near future? How would nationalization of lithium in some LatAm jurisdictions impact the sector?
Scholey: Again, disputes arise when the goal posts move. Is nationalization of lithium or any other commodity or government interference in that purpose considered direct expropriation? The LatAm situation is currently very fluid. Governments and states are watching each other to see how this activity unfolds. Security of supply is leading to increased competition and is incentivizing new mining projects and partnerships. In the supply chain, miners are moving closer on the supply chain to the EV makers. There has been a global shift away from the business model of “mining and shipping” to the development of in-country “refining” due to taxation and other government subsidies or incentives. Geopolitical factors are also encouraging this shift.
Burnett: There is a case to be made that nationalization of lithium assets by LatAm jurisdictions may amount to both direct and indirect expropriation. From a legal standpoint, direct expropriation involves the physical seizure of a foreign investor’s property or the title to such property by a host state, whereas indirect expropriation involves measures resulting in a substantial deprivation of the use and value of a foreign investment, even though the actual title of the asset remains with the foreign investor. Nationalization will constitute expropriatory action unless it fulfills the requirements contained in the particular investment treaty or free trade agreement in question, which are typically that the expropriation must be: (a) for a public purpose; (b) non-discriminatory; (c) in accordance with due process; and (d) only effected upon payment of prompt, adequate and effective compensation.
These requirements are cumulative and a host state’s failure to fulfill any one of them will suffice for an investment claim against the state and a finding of illegal expropriation. Among the relevant issues to watch for is whether governments will work with foreign investors for the development of these projects and partnerships or whether they will give in to forces that have previously resulted in expropriatory action, for example in the hydrocarbons industry.
Rosen: There is an imbalance in the demand and supply equation, which led to a short-term dip in the price of lithium from its high in November 2022, and which may have an effect on the capital that is drawn to this metal.
There is a lot of new investment in lithium due to its strategic importance as a contributor to “green energy” battery technology that has resulted in the decline of the commodity price. The time it takes to develop this new exploration into active mines that are contributing to the global supply of battery materials is currently quite optimistic, leading to the market’s reaction to prices.
It is more likely that these mines will take much longer to come online (lithium is easier to mine than most metals, but more difficult to produce economically), and thus there is enormous potential for disputes (both commercial and investor-state), as timelines to production are not met, and various cohorts of stakeholders are disappointed. This will also lead to an eventual recovery in lithium prices, raising the stakes for the value of disputes.
The nationalization of lithium projects by LatAm jurisdictions would have a disastrous effect on the supply of lithium, as most countries do not have well developed human resources or experience in mining, processing and marketing (with perhaps the exception of Codelco in Chile, which was born out of the nationalization of the copper industry in 1971, and later combined in 1976). It is difficult enough for experienced mining companies to bring their projects to commercialization, and most jurisdictions do not have the proper mechanics in place to achieve commercial results. This could also have a chilling effect on commercial actors’ willingness to invest in countries that they perceive as too risky.
Nationalizations, borne out of genuine concern for the environment or indigenous stakeholders or out of a sense of the ability to generate more value than will be realized from the “economic rents” currently negotiated with international mining companies, will inevitably lead to an increasing number of investor-state disputes.
Commission: What impact will the increasing focus on ESG have on mining sector disputes?
Burnett: Recent examples have shown failure to focus on ESG issues can result in substantial reputational damage to corporations and stakeholders in the mining industry. Accordingly, if not for their own sake or for the fact that carefully considering environmental impacts, social impacts and ethical governance rules are inherently positive, mining companies will continue to focus on ESG issues because doing so is good for business.
We are seeing a “hardening” of legal norms on business and human rights with jurisprudence from the Inter-American Court of Human Rights providing that the UN Guiding Principles on Business and Human rights is a “legal duty” under the American Convention on Human Rights. National laws are now in place and there is proposed EU legislation providing for mandatory human rights due diligence by large companies based in, or doing business in, those countries. Recent ISDS awards and decisions show a trend toward increasing recognition of the relevance of international human rights law, including environmental law, at all stages of ISDS proceedings.
Human rights-based arguments are raised in a variety of contexts, including jurisdiction based on compliance with governing law, investor human rights claims, arguable human rights obligations of investors, human rights and environmental defenses by states and counterclaims, remedies and annulment of awards.
The mining industry is generally characterized by long-term investments and a keen focus on the future, which plays inherently well with ESG awareness. In addition, the focus on ESG scores from key financial stakeholders such as BlackRock or Vanguard ensures that ESG issues are not ignored in the mining industry. We expect that the focus on ESG issues will continue to increase and the mining industry will continue to adapt and adjust to these concerns as will other stakeholders and industries.
Rosen: As stakeholders and regulators heighten their scrutiny of mining companies, disputes related to environmental damage, perceived social injustices and governance failures could multiply. Environmental plans and social license initiatives in the last decade have been as much a part of mining as exploration. The governance aspect is a concern for most public companies, and certainly the mining industry is populated by many small cap mining companies that have raised equity for the purposes of exploration.
Despite a homogeneous and widely accepted method of measuring compliance with ESG, disputes could emerge not only from regulatory bodies but also from aggrieved local communities, NGOs or shareholder activists who demand companies maintain ethical, sustainable practices. In addition, companies not conforming to ESG standards might face financial repercussions, reputational risks and investor disengagement. Shareholder legal actions against the perceived mismanagement of mining companies will undoubtedly lead to litigation as well (read the news concerning Glencore and Teck Mining in Canada), as shareholders are principally concerned with earnings and value of shares as opposed to some of the governance issues being faced and met (or unmet) by management.
Scholey: In the mining sector, there has been an increased focus on ESG impacts and their financial and reputational risk to companies. The mining business should care not only about making money, but also focus on compliance with respect to environmental impacts, social aspects and good governance. The closer connections being made between miners and EV makers will draw greater scrutiny on “commodity cleansing” by way of metal reprocessing or the production of metal by-products and the different global players involved in this activity.
European regulators have formulated new disclosure requirements and the need for investors to have greater information on ESG issues and whether such factors are deemed financially material. Double materiality is a concept that describes how a company’s information could be important from a financial perspective and the company’s impact on the world at large, especially with respect to environmental impacts and climate change. In basic terms, a company’s impact on the world beyond finance can be material and therefore could require disclosure. The concept of double materiality requires further analysis, and its meaning remains up for debate by experts.
In general, decarbonization remains somewhat of a puzzle for policymakers and for the mining industry. Whether US regulators assess disclosure information on ESG issues as material for company reporting or mandate a set of climate disclosures will be under further consideration.
Commission: Calculating damages in investment mining disputes is particularly complex given the size and scale of projects. How should mining companies with pending claims assess potential damages?
Rosen: Mining companies are required to maintain meticulous records of exploration and development activities. This is required so that competent persons (as defined by various global mining codes) can examine and uniformly describe the state of advancement of a property (resources, reserves, et cetera) for various stakeholders.
Mining properties that have undergone exploration activities with positive results are generally worth more than the costs incurred to make a discovery (i.e., they have improved the value of the property). The stage of discovery and development of a property will signal an accepted methodology to value the company should they be subject to investor-state measures that are deemed to be breaches of a treaty. There are several mining codes around the world that are consistent in how the stage of development is described, and which valuation methodologies are generally accepted for public company disclosure. These codes are meant to protect ordinary investors in public companies and are not restrictive or prescriptive.
In the commercial world, transactions between investors and mining companies happen on a regular basis and are reported on various information databases. These transactions and trading multiples provide a dataset from which market comparable information can be obtained. Additionally, if a project is sufficiently defined that an investor can reasonably create a cash flow projection, a discounted cash flow (DCF) calculation can be performed to determine value.
The codes that are used by professionals in the mining industry (both to define resources and reserves and to perform valuations) are generally relied upon in investor-state disputes. Again, these codes should be used as guidelines, but do not prohibit the use of market information (in fact, in all stages of development, these codes encourage the use of market information).
Companies with potential or pending claims should view the exercise as similar to getting their company ready for sale. They should reasonably expect that a calculation of damages would be similar to a price they would receive in the marketplace from a qualified buyer.
Burnett: In mining disputes, parties and tribunals generally favor a DCF method to quantify damages over other methods of damages valuation (market approach or asset approach). The DCF method quantifies the value of an asset through expected future cash flows, as opposed to the market approach (which uses comparable market prices to value assets) or the asset approach (which uses adjusted book value or net asset value to indicate the value of assets). The DCF method is also preferred in comparison to other income approaches such as capitalized cash flow (CCP) or adjusted present value (APV) because it allows parties and experts to properly account for their assumptions and risks in resulting discount rates, which provide greater certainty for tribunals.
It is typical in the pre-production phase of extractive projects for miners to conduct a great deal of information and data gathering. Miners usually engage experienced professionals and spend millions of dollars to conduct feasibility studies (scoping studies, pre-feasibility studies and definitive or bankable feasibility studies), which lend themselves to serving as the bases for DCF analysis. Projections of expenses and revenue can also be forecasted with reasonable certainty in mining projects, which would also serve as relatively reliable bases for DCF calculations.
The established international market for mineral resources provides reasonable certainty for pricing and demand, and market demand and prices are routinely forecasted by market analysts and exist irrespective of any individual project. Although we have seen ISDS tribunals award sunk costs for pre-production projects despite massive amounts of reliable data resulting from detailed studies, we consider that the DCF method is a highly reliable approach, even where production has not commenced, and we expect it to remain one of the prevalent damages’ valuation methods for mining disputes.
Commission: Given the high-value nature of disputes, claims in the sector are also very expensive. What role can legal finance play in helping companies to manage the associated risk and costs or generate liquidity from their pending claims or awards?
Burnett: Legal finance can help companies manage risks and generate liquidity. First, legal finance allows companies to keep their funds where their rate of return is higher, which is generally core activities. In addition, contracting for legal finance allows companies to remove legal fees and expenses from their balance sheets, which then ceases to affect their quarterly and yearly results and provides additional predictability and security for stakeholders.
Second, legal finance allows companies to share the risk of potentially not recovering all their damages or being unable to effectively collect on those damages. At a minimum, the involvement of a funder reduces the required use of amounts of available cash that would otherwise constitute working capital and that companies end up having to earmark for disputes.
Third, legal finance provides not only an independent assessment of the strengths and weaknesses of the case, but also the comfort that a dispassionate third party concurs with the companies’ assessment and is willing to financially support that position through a non-recourse loan. The very nature of a non-recourse loan demonstrates its high risk for the lender, which means that a funder’s undertaking to finance a case is an indication of the strength of that case.
Lastly, not to lose sight of one of the key roles that funders can play, when damages are so destructive that the investor no longer has the financial capability to withstand a dispute, funding becomes an essential mechanism for the administration of justice. This can be especially important with newer or smaller companies that may have a single asset that has been suddenly and significantly impacted by a dispute. In our practice we have had several instances in which a host state left an investor so fundamentally broken that without the involvement of a funder the injustice would never have been properly redressed.
Rosen: Third-party finance plays an important role in managing risk, costs and liquidity in the face of high-value disputes in the mining sector. With the help of funding, mining companies can offload the significant financial risk associated with arbitrations. Funders bear the upfront costs and risk of losing the dispute, thereby allowing companies to pursue their claims without putting a cash flow drain on their resources. If the claim is successful, the funder receives a portion of the proceeds and thus acts as a buffer; safeguarding companies from the financial strain of arbitration while enabling them to focus their financial resources on their core business activities.
An important consideration that is often overlooked is the effect on the P&L of a public company that has cash flow generating operations. Using “off balance sheet” financing removes the cost of the arbitration from the ongoing operating profit of the company, and thus has no impact on earning and common measures of financial operating performance.
Harry Burnett is a partner at King & Spalding with a focus on international commercial and investor-state arbitration matters, along with general domestic and international litigation. He has been ranked in Chambers Global, Chambers USA, Chambers Latin America and Legal 500 for international arbitration and been recognized by The International Who’s Who of Oil & Gas Lawyers and The International Who’s Who of Energy Lawyers.
Howard Rosen is a Managing Director at Secretariat in Toronto with over 40 years’ experience of advising on all aspects of business valuations, damages quantification and corporate finance related matters. He has been listed by Who’s Who Legal as one of the top experts in international commercial arbitration worldwide, every year since the inception of the list in 2011. Mr. Rosen is recognized consistently by Who’s Who Legal annually in a number of key listings, including Thought Leaders Global Elite – Mining Experts 2023. He is also a qualified valuator under the Canadian Institute of Mining’s valuation standards and guidelines (CIMVAL), and a member of the CIMVAL committee.
Brenna J. Y. Scholey is a Principal Metallurgist and global disputes coordinator at SLR Consulting (Canada) Ltd.’s Mining Advisory group in Toronto with over 35 years in the mining and metals businesses. She advises on international mining disputes, performs due diligence and independent engineering reviews, and consults on mining operations and projects worldwide. Scholey is recognized as a consulting expert in Who’s Who Legal – Mining Experts 2019 to 2023.
Moderator:
Jeffery Commission is a Director with responsibility for overseeing Burford’s underwriting and investment activity in investor-state and international commercial arbitration. He is an authority in the field of international arbitration, having been involved with several multi-billion-dollar investment arbitrations and international commercial arbitrations throughout his career.