Mining is a very interesting and active sector in Turkey, with earn in style agreements being one of the core transaction types we enjoy handling. These are usually relatively complex deals to conclude, with significant challenges to overcome due to the extended time periods involved in fulfilling the deal criteria. In this article we will highlight some common issues that arise in these deals.
Transactions can be governed by any international law the parties may choose, but elements specific to Turkish mining activities (such as term and extension of licences, technicalities and reporting procedures) must be dealt with under Turkish law. The core law applicable is the 'Mining Law' No. 3213 and its related Communique, as well as the 2010 'Amendments to Mining Law' No.5995, introduced with various aims including increasing sector attractiveness to international investors and to raise environmental and health and safety standards. This is regulated by the General Directorate of Mining Affairs (MIGEM).
Earn-in Joint Ventures give rise to some intricate areas of law due to the nature of the deal, such as offshore arrangements for tax purposes, considering income tax on share transactions, separating assets if more than the target asset is held under the same company and nuances of the local company type.
In a recent transaction the Licence holder was a Turkish company set up to hold local assets (the Seller) by two separate international mining companies as shareholders. They wanted to sell a particular licence area to a local group company, and this deal provides a decent example for discussion of key issues.
Since the only assets of the Seller in this case were its local licences, the buyer understandably required guarantee from the international parent companies. This raised another important tax consideration when structuring these deals.
For the uninitiated, Stamp Duty in Turkey can provide some surprising additional cost to a transaction. Stamp is applicable to any binding agreement and is based on the contract value. For these deals, Stamp is calculated at 0.825% of contract value payable on each original signed document; if both parties hold an original then they are liable to pay 0.825% each (i.e. 2x Stamp). Because of this, it is common in many types of deal for only one original to be officially held, with one side having a copy and parties agreeing to split the single Stamp cost between them. Added complication arose because each Guarantor attracts an additional Stamp, so in this case, with two Guarantors significant cost is added through two further additional Stamps payable.
Another consideration comes from the nature of an earn-in; the contract may have a total value in the millions, but the agreement may be terminated early with a far lower value having changed hands. Full Stamp Duty is currently payable upon signing of the contract rather than at each time a payment is made.
The Option Agreement is signed at the beginning. The buyer will usually want the relevant shares to be deposited with an independent trustee to act as escrow. It is often preferable to create a share pledge or blank endorsement into the escrow, since a seller is unlikely to want to endorse shares in the purchasers name immediately; this avoids having to reverse a transfer if the deal fails during the option period.
During exploration stage there are reporting requirements to MIGEM to maintain the Licence which must be considered in this structure. Prior to 2010 use of Rodovans Agreements were common practice and performed a similar function to the current JV arrangements, but under the Rodovans relationship the buyer was able to submit directly, but this relationship is no longer recognized by MIGEM.
The buyer uses their own staff and equipment to fulfill exploration requirements in the same way they would as an owner, but the exploration reporting requirements and obtaining of permits can now only be fulfilled by the licence owner, not the buyer.
In practice the licence owner/seller can give a Power of Attorney or create a signatory delegation to someone in the buyer company via a board circular in order for the buyer to submit on the licence owner's behalf. Protection can then be given to the seller by including indemnification clauses in case of problems caused by the buyer, such as cancellation of the licence or penalties.
In the recent case it was agreed that for the first year the buyer would perform exploration activities to meet determined criteria including a minimum financial expenditure. During this period the licence remained wholly owned by the seller. The buyer then decides whether they wish to pursue the mine site based on their findings.
If the buyer chooses not to continue or the closing is otherwise unsuccessful:
If closure fails, the parties terminate the agreement. Clearly a risk to the seller can be that insufficient activity has been carried out during the preceding period to satisfy Licence retention criteria. Ensuring that indemnification is included in the Option Agreement in favour of the seller is important in case this situation transpires. It is also possible to include penalty provisions for non-continuance by the purchaser, but that would almost certainly not be agreed.
If the buyer chooses to continue:
The buyer issues an option notice to purchase shares in the licence holding company. Closing can then take place and the shares are transferred to the buyer in return for any other purchase obligations, which could be money payment or perhaps delivery of a specified amount of gold (as was the case in the recent deal). The amount of shares transferred at this point varies from deal to deal but is usually majority with option to increase stake later, or outright purchase of 100%.
Under Turkish law the Licence can only be owned by a Turkish entity (a Turkish company can be foreign owned). If a foreign buyer is involved and is acquiring 100% then their new management board will officially take over on the closing date. If the share purchase is majority then management and decision rights should be pre-defined; this can either be done via a separate annexed Shareholder Agreement or via clauses within the main Option Agreement, both of which should become effective upon closing.
Structure of payments and obligations are of course subject to agreement but typically these deals are structured over 4-5 years. Within this timeframe, usually on each anniversary of the closing, the buyer will need to deliver payments (such as money or gold) and demonstrate meeting further exploration expenditure criteria set out in the Option Agreement.
At the end of this 4-5 year period there are several possible scenarios. If the seller is a minority shareholder they will often look to exit, or allow the buyer to increase their stake further in return for further payments and site investment. A common exit, and often inserted to the agreement as an option at the discretion of the seller, is to transfer the minority shares into an ongoing royalty like NSR.
If the purchaser acquires 100% shares on closing (at the end of year one in the current example), earn in arrangements can still be used as appropriate, but payment structuring tends to be more front loaded. In this case, if the buyer fails to meet criteria then the seller's recourse is limited to the agreement only.
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.