Canada: L'épineuse problématique de l'amodiation – The thorny issue of "Amodiation" in Francophone Africa

Last Updated: September 23 2019
Article by Mining Prospects, Daye Kaba and Pierre Langlois

« Le permis de recherche constitue un droit mobilier, indivisible, non amodiable ni susceptible de gage ou d'hypothèque » 1  [emphasis added]

A substantial number of the companies operating in the mining industry in Francophone Africa are from common law jurisdictions such as Australia, the United Kingdom or Canada.  Executives of such companies oftentimes assume that things work a certain way in the mining industry and that, for example, earn-in or option agreements (agreements pursuant to which a company is able to acquire an interest in a project or project company provided that it performs certain work and financial obligations) are a well-established and widely accepted method through which a mining company can either grant or acquire mining rights in pretty much any jurisdiction. 

Companies that tend to assume that the type of flexibility afforded under common law regimes should more or less prevail in other jurisdictions would however be well-served to pay closer attention to the details of the laws of the countries in which they operate, in order to ensure that the assumptions they make regarding earn-in arrangements are consistent with the laws of those jurisdictions.

The fact is that the mining legislation of a number of countries in Francophone Africa contains a variation of the provision cited at the beginning of the article, which on its face, does not allow exploration permits to be subject to earn-in arrangements. 

In this article, we discuss the concept and background of "amodiation", and suggest that it should be considered carefully when structuring acquisitions or dispositions of mineral properties in Francophone Africa.

What is amodiation?

"Amodiation" is defined in a number of mining codes as the lease for a definite or indefinite period without the ability to sub-lease of part or all of the rights attached to a mining title, in consideration for such remuneration as agreed to between the parties. 2 

It is our view that this definition is imperfect inasmuch as the term "lease" suggests that while the lessee will enjoy the usufruct of the mineral property, it will not ultimately acquire an interest in the mineral title.  In practice however the form of remuneration agreed to between the parties typically entails the "lessee" being granted an interest in the mineral project or in the company holding title to the mineral project provided that it fulfills its obligations under the arrangement.  In fact, in our experience the remuneration or consideration sought by companies entering into amodiation arrangements is almost always the acquisition of an interest in the relevant mineral project.  As such, the concept of "amodiation" seems closer to the concept of the "farm-in" or "earn-in" than it is to the concept of the lease. 

Moreover, we note that the mining codes that state that amodiation is not allowed in respect of exploration permits typically expressly allow it in respect of mining permits (permis d'exploitation).  Why is that the case?

Overview and background

It is our assessment that the definition of amodiation as adopted in a number of jurisdictions in Francophone Africa stems from the practice that developed in the Democratic Republic of Congo (DRC) in a context which is arguably significantly different from the context of most other jurisdictions in Francophone Africa.

We understand that the practice of amodiation developed in the DRC in the early 2000s where State-owned mining companies (such as Gécamines) had a number of development-stage assets in respect of which they held mining permits but did not possess the resources, either technical or financial, to develop.  As such,  the 2002 mining code of the DRC enshrined the concept of "amodiation" pursuant to which a third party company would finance, develop and operate the mining projects on behalf of the State-owned companies, and would make payments to them in the form of maintenance and royalty payments in consideration therefor.  Article 177 of the DRC Mining Code (2002) not only defined amodiation but also set out the obligatory provisions required in amodiation agreements. Furthermore, in 2006, a model amodiation agreement3 of Gécamines was adopted to form the basis upon which amodiation agreements between Gécamines and third parties would be entered into.

We note that the definition given to the term "amodiation" in the DRC Mining Code (2002) 4 is identical to the one used in a number of mining codes that were enacted post-2002 throughout Francophone Africa, although one would argue that the context of those jurisdictions is markedly different from the one which gave rise the development of this practice in the DRC.

As currently drafted, "amodiation" as defined in the mining legislation of a number of countries in Francophone Africa, appears to be a form of arrangement intended to allow development stage companies to gain access to financing and technical expertise to get projects through to the mining phase.  The fact is that unlike the DRC in the early 2000s, most countries in Francophone Africa do not have a large number of development-stage mining assets held by State-owned companies that they are desperately seeking to bring to production.  These countries should focus on boosting investments to their exploration sector by removing unnecessary hindrances including those in the form of restrictions on earn-in arrangements.

Amodiation of exploration permits

In practice, in the context of an exploration-stage company, amodiation generally corresponds to an arrangement pursuant to which the holder of the exploration permit agrees to grant an interest in the project to a third party provided that such third party completes certain works and incurs certain expenditures on the project.

The reality of the mining industry is that a mining project in respect of which a feasibility study has been completed will have a number of financing options available (including project financing) and will generally have a lesser need for amodiation than an exploration-stage company.  To assert that the ability to enter into an amodiation arrangement is generally more important for exploration-stage companies than it is for development or mining stage companies does therefore seem fairly axiomatic.

It is known in the mining industry that the vast majority of the exploration of greenfield projects is done by cash-strapped junior mining companies which tend to obtain their financings on stock exchanges such as AIM, the ASX or TSXV, are very much dependent on their ability to raise financing on these exchanges, and are highly susceptible to the cyclical nature of the mining sector.  These are precisely the types of companies which from time to time may need to farm-out some of their rights in order to, as the case may be, survive, hold on to their exploration projects or advance them.  The ability to enter into earn-in arrangement is also relevant to larger companies with greater access to capital which may elect to pursue the amodiation route for strategic reasons or for purposes of diversifying their exposure and mitigating their risk.

This raises the question as to why so many mining codes in Francophone Africa do not allow the amodiation of exploration permits.

Rationale behind the restrictions on amodiation for exploration permits

It seems likely that in the mind of the legislator, as the applicant of an exploration permit is required to demonstrate technical and financial capability, the grantee of an exploration permit should possess the requisite technical and financial resources to execute the work program contained in its permit application without the assistance of a third party.  Clearly, this rationale ignores the reality of mine financing and of the mining industry. 

Additionally, over the past several years, a large number of the mines administrations and civil societies in Francophone Africa have expressed their concerns with regard to what is characterized as the speculation of mineral permits by foreign companies (i.e., companies without financial and technical qualifications that purportedly scour the African continent in search of permits that they have no intention of developing but rather are keen to acquire and sell to other companies for a profit). 5   Irrespective of the views one might hold regarding the "speculation" of mineral permits, and whether in the end it constitutes a net benefit or a disadvantage for host countries, the fact is that it remains a highly sensitive and contentious issue in the public opinion in Francophone Africa.

Moreover, mines administrations generally consider that the grant of an exploration permit is intuitu personae, a concept well known to civil law that affirms that the person to whom a right is given or with whom a relationship entered into is essential to the contractual or legal relationship.

Not all of the countries in Francophone Africa have followed the lead of the DRC in relation to the treatment of amodiation in their mining legislation. The Republic of Guinea is an example of a country that appears to have embraced a more pragmatic approach on this issue, as it allows the holder of an exploration permit to enter into technical partnerships to raise the necessary capital to finance exploration activities, provided that the partnership is submitted to the Minister of Mines for his approval and that the permit is not transferred either directly or indirectly. 6   This approach gives the titleholder some flexibility to enter into earn-in arrangements, while addressing the concerns of the mines administration by giving it the ability to review and sign off on such arrangements. 7 

Because the restrictions respecting earn-in arrangements for exploration permits are not consistent with the practice in the mining industry, it appears that a number of mining companies simply disregard them.  We would suggest that companies ignoring these restrictions do so at their own peril.

What are the consequences of a breach of the provision on amodiation?

Entering into an "unlawful" earn-in arrangement can cause significant adverse local liability. For example, in Côte d'Ivoire, article 182 of the mining code states that the holder of a mining title that does not submit for prior approval to the administration all of the memoranda of understanding or agreements pursuant to which it intends to entrust, transfer or assign in part or in full the rights and obligations related to said title can be subject to imprisonment between 1 and 3 years and a penalty between 10 million and 50 million FCFA.  As well, the relevant permit can be subject to revocation. 

Additionally, companies purporting to conclude amodiation arrangements in respect of an exploration permit take on significant risk considering that such arrangements may not be recognized by the mines administration, and that in some cases, the mines administration could even take the view that the relevant company is engaging in unauthorized exploration operations.

Final Thoughts

As discussed above, the rationale behind the restriction related to amodiation of exploration permits seems inconsistent with the realities of the mining sector and the financing of exploration projects.

Too often in an effort to benchmark, drafters of mining legislation include provisions from other mining codes that do not reflect the realities of their country.  Restrictions on the ability to enter into earn-in arrangements limit the ability of companies to obtain financing and to develop exploration stage mining projects, and ultimately impede the development of the mining sector, while adducing little benefit to host countries.

It is our view that mining codes should be aligned with the realities of the mining industry, and that as such, title holders of exploration permits should be allowed to enter into amodiation arrangements with third parties, subject to reasonable terms and conditions to be set out in the relevant legislation.  In the meantime, companies should comply with all applicable mining legislation.  There are ways to work around restrictions related to amodiation.  Companies should consult with their legal counsel prior to entering into earn-in agreements in order to ensure compliance with the relevant legislation.

Footnotes

1. Article 20 of the 2014 Mining Code of Côte d'Ivoire

2. See definitions section of mining codes of Mali (2012) and Côte d'Ivoire (2014), Guinea (2011 as amended in 2013)

3. Convention Type d'Amodiation de la Générale des Carrières et des Mines - Contrat No. 31/COPIREP/SE/02/2005

4. L'amodiation consiste en un louage pour une durée fixe ou indéterminée, sans faculté de sous louage, de tout ou partie de droits attachés à un droit minier ou une autorisation de carrières, moyennant une rémunération fixée par accord entre l'amodiant et l'amodiataire. (article 177)

5. Those familiar with this issue will recall that the concern regarding the speculation of mining titles gave rise to the introduction of the capital gains tax on the transfer of permits in a number of jurisdictions of the region.

6. See article 19 of the Guinea Mining Code (2011 as amended in 2013)

7. With that said, we think that to the extent that the Minister approves the arrangement, an indirect transfer of the permit should be permitted through an earn-in into the project company.

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