Mining companies in Canada are feeling the pinch as emerging market growth wavers and commodity prices show little sign of picking up.
Home to heavyweights such as Barrick Gold Corp, First Quantum Minerals Ltd and the Potash Corporation of Saskatchewan Inc, the Canadian resources space is anything but a walk in the park. This is potentially bad news for local communities scattered around this vast country dependent on the sector for their economic wellbeing.
Mining companies have reduced spending, scaling back unnecessary exploration and postponing expansion plans. While the global economic outlook remains uncertain and commodity prices volatile, identifying a source of financing to strengthen operations and progress expansion plans will be key.
Project financing is being used to the extensive capital requirements of some mining companies with sustainable long-term projects. This financing involves the long-term funding of a single-purpose project company. The repayment obligations are secured by the project's assets and cash flow.
Project financing is ideal for a capital-intensive major infrastructure, such as a mining project. Given the lenders' exposure to project risk, the due diligence of the mining project and its associated risks is extensive and thorough.
The following are critical elements in mining project financing.
Strong sponsorship and committed equity
Lenders will need to be confident the project is backed by strong and competent sponsorship and sufficient and available equity. Junior mining companies will likely be required to fully commit their equity or ensure it is fully accessible to the lenders before any lenders' funds are disbursed. Deferred equity return instalments (pro-rated to disbursements) may be permitted for the more robust companies, particularly those offering strong corporate completion guarantees during construction.
Aboriginal rights and the duty to consult
Aboriginal and treaty rights are entrenched in the Canadian Constitution, which makes them a key consideration in due diligence. Mining exploration, at all stages, from the issuance of the initial regulatory permits to mine closure and remediation, has the potential to adversely affect these rights.
While the duty to consult with Aboriginal communities rests with the Crown, mining companies are strongly advised to get involved early, engage with Aboriginal communities and take the lead on consultation and any necessary accommodation of Aboriginal concerns.
Such accommodation could be through mitigating risks, creating jobs or profit sharing. Lenders will expect to be informed of the effect of Aboriginal and treaty rights on the project, and will seek assurances that suitable accommodations and risk mitigants are in place.
In an effort to promote sustainable development, the World Bank and its financing arm, the International Finance Corporation (IFC), developed the IFC Performance Standards on Environmental & Social Sustainability, most recently updated in 2012.
They are incorporated by reference in the Equator Principles, a credit risk management framework used to determine, assess and manage the environmental and social risks associated with certain project based financing. There are currently 79 signatory financial institutions committed to complying with the principles. As a 'Designated Country' under the Equator Principles, Canada is considered to have sufficiently robust environmental and social laws and compliance regimes designed to protect people and the environment.
Lenders typically expect to be granted security over both land rights and personal property rights. Not all lenders will be familiar with Canadian laws and practices. As part of the due diligence process, lenders may need to be given comfort that their security interests will be valid, perfected and can be effectively enforced. Canadian law is relatively flexible in respect of granting security and sharing security through a collateral agent or trustee.
There are, however, detailed rules that must be followed in relation to the perfection, registration and enforcement of collateral security. Effective security may be taken over most assets, including shares, moveable and immoveable property, contractual rights and receivables, intellectual property and future assets.
The priority of security depends on the time of creation and any relevant registration, publication or notice requirements, subject to certain statutory priorities and super-priorities. Security can, in most cases, be enforced without court approval through a receiver or other officer appointed to collect and sell assets for the satisfaction of the debt.
Ethics and anti-corruption
As a member of the Organisation for Economic Co-operation and Development (OECD) and signatory to the OECD Anti- Corruption Convention, Canada has statutory anti-corruption safeguards. Although anti-corruption legislation has existed for decades, recent high-profile cases in Canada have renewed discussions and focus on this area.
Broad new amendments to Canada's Corruption of Foreign Public Officials Act also came into force in June 2013. In January 2014, the Resource Revenue Transparency Working Group – comprising the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay Canada and the Revenue Watch Institute – released its final recommendations on creating mandatory transparency standards.
These would require mining companies that are publicly traded on Canadian stock exchanges to publicly disclose payments to governments. Contractual anti-corruption provisions are not uncommon. All lenders will likely require anti-corruption and bribery covenants as a condition to disbursement.
Practices in the international project-finance market may not always mirror the Canadian approach on every aspect of the transaction. International lenders may require additional diligence or documentary deliverables at closing. Mining companies should be prepared for these requests and, as necessary, be flexible in their approach.
Norton Rose Fulbright Canada LLP
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First published on nortonrosefulbright.com February 2013.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.