Canada: Crafting The Next Generation Of NSR Agreements In Quebec

It is not uncommon for mining property transactions to include the payment of a royalty as part of the vendor's consideration, such as a Net Smelter Return (NSR), through which the holder typically receives a percentage of the value of production or net proceeds earned by the grantor from a smelter or refinery. 

The Quebec Court of Appeal's Aug. 6, 2013 judgment in the matter of Anglo Pacific Group PLC v. Ernst & Young Inc. provided important guidance to holders of NSRs in mining projects in Quebec. It also highlighted that customary NSR agreements registered in the Mining Register were not enforceable against third parties under the civil law of Quebec. 

Sellers in post-Anglo Pacific transactions of Quebec mining properties should pay close attention to the drafting of any NSR agreements and obtain professional advice to limit the risk that their royalty becomes only a hollow promise of income. There are often ways to structure mining property transactions involving NSRs that enhance their enforceability. 

To recap, the court ruled that an NSR is only enforceable against third parties if it creates a real right – as opposed to a personal right – over the mining property. A real right establishes a direct right for the grantee over a thing or property, and as such is enforceable against anyone once the formalities of publication have been satisfied. Real rights, on the one hand, attach to and follow the property, conferring upon their holders a right to "pursue" the property despite any change in ownership. Personal rights, on the other hand, may only be enforced against the grantor of the royalty personally for the performance of an obligation. Therefore, if the underlying mining claim or lease is conveyed to a third party or if the grantor becomes insolvent, a "personal" royalty becomes unenforceable and therefore worthless as was the case for Anglo Pacific's NSR. 

The Court of Appeal also clarified the applicable legal publicity regime: real mining rights, such as mining leases, registered in the Mining Register are enforceable against the state only. To be opposable to other third parties, real mining rights (unless exempted under the Mining Act) must be published in the register of real rights of state resource development of the Quebec land register. Care must therefore be given to the registration of mining rights in the appropriate registries. 

We recently acted for a group of mining property owners in the context of a transaction that involved the sale of a mining property with an NSR as consideration. While the Court of Appeal held that it is possible to create a mining royalty that is a partial ownership right (technically a "dismemberment" of the right of ownership) and provided guidance on how to do so, the practical reality is that royalty agreements are seldom designed to grant the royalty holder with such direct rights in the mining claims, leases and/or extracted mineral substances. 

Our challenge was therefore to structure an agreement that granted sufficient real rights to the royalty holders (defined in the agreement as "right holders") while allowing the new owner of the mining property to conduct its regular mining activities without being unreasonably encumbered. The resulting agreement addressed this issue by providing that the mining company benefits from unfettered access to the newly acquired property, notwithstanding the real property rights and the recourses of the "right holders," in exchange for the timely payment of a royalty. The real rights are quantified as a percentage of the volume of minerals present on, or extracted from, the property and the right holders may at any time, and for any period, elect to receive payment of these rights "in kind" (by delivery of extracted minerals), in which case – and during which period – the royalty ceases to be payable. In addition, the agreement provided for a reversionary interest allowing the right holders to reclaim portions of the property in certain cases, including the surrender, expiry or abandonment of the property by the mining company. 

Publishing the resulting document entitled "Real Rights and Royalty Agreement" in the Quebec land register also presented a challenge. The land register had never dealt with the publication of an "unnamed" real right resulting from the dismemberment of the right of ownership and had no pre-established category under which to publish the agreement. It was therefore published against the property as an "assignment" given that the agreement also included the initial transfer of the mining property from the right holders to the mining company. 

Since the lessons of Anglo Pacific remain largely theoretical and untested, there may be various ways to structure these "next generation" NSR agreements in Quebec. But from one case to the next, the objective will remain to strike the right balance between the legal requirements set out by the Court of Appeal and the commercial realities with which the contracting parties must compose.

The article first appeared in the August/September 2015 issue of the Canadian Institute of Mining Magazine, Vol. 10, No. 5.

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.

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