THE JUNIOR/MAJOR STRUGGLE
NEGOTIATING OPTION/JOINT VENTURE MINING AGREEMENTS1
Darrell Podowski, Cassels Brock & Blackwell LLP, Vancouver, BC, Canada
Fred R. Pletcher, Borden Ladner Gervais LLP, Vancouver, BC, Canada
Kuno Kafka, Antofagasta Minerals Canada, Toronto, ON, Canada
Keenan Hohol, Pan American Silver Corporation, Vancouver, BC, Canada
Introduction
With the recent weakness in global commodity prices, and the inability of many junior mining companies
to raise sufficient exploration financing in the capital markets, junior companies are increasingly turning
to an option and joint venture model to maintain and advance their mineral properties. In an option and
joint venture model, a junior exploration company (the “Junior”) will grant an option to another company
(usually a more established company with available cash, the “Major”) to earn an ownership interest in
their mineral property (typically earning a controlling interest in one or more stages) in exchange for the
Major agreeing to fund certain minimum expenditures on exploration programs and/or delivering
technical reports or achieving technical milestones on such property over a set period of years. Typically,
the junior company is carried (i.e., is not required to contribute any funds) for the initial stages and as the
project advances there is a turning point where the Junior and the Major start contributing to the project in
proportion with their participation interest in the project. An option and joint venture transaction of this
nature, however, must be structured and planned out properly, because strict compliance with an option’s
terms is required to maintain the option in many jurisdictions. If the party earning into the target property
is a day late or a dollar short of their earn in obligations, they could lose their right to earn an interest in
such property. Therefore adequate time periods need to be provided for, and appropriate cure periods and
force majeure provisions should also be included, to guard against a party unfairly losing their right to
earn an interest in a property as a result of missed deadlines caused by events that may be beyond their
control.
Option and joint venture transactions are attractive to Juniors as they can fund exploration programs on
their properties without having to raise their own funds and/or dilute their share capital at the initial stages
and, if a publicly listed company, hopefully then see an appreciation of their share price as exploration
proceeds. The Junior will try to achieve the following:

A desire to achieve good results quickly to advance their property and have their share price
appreciate in value, and to get to production as quickly as possible so they can be bought out by
their Major partner, or sell to a third party;

Assurance that programs will be completed and properties kept in good standing;

Assistance with project funding and completion guarantees after the full carry portion of the earn
in is completed;

Receive a technical report on the project before being obligated to fund its proportionate share in
the project where such report may facilitate their ability to obtain financing to fund their
proportionate share of work programs;

Minimal dilution;
1
This paper was presented at the Rocky Mountain Mineral Law Foundation/International Bar Association (SEERIL & LARF)
Special Institute on International Mining and Oil & Gas, Law, Development and Investment, in Cartagena, Colombia on April
21, 2015, and was originally published by the Rocky Mountain Mineral Law Foundation in the manual of this Special Institute.
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-2
Flexibility to sell their interest to any third party.
This model is also attractive for the Major as it enables them to explore early stage promising properties
and possibly in jurisdictions in which they are new to, without a large commitment of cash or personnel.
The Major will try to achieve the following:

Want as much time as possible to earn an interest;

Retain tight control of programs/budgets to ensure projects developed to their own standards;

Do not want to cede discretion to the Junior regarding budgets/spending;

Want as much flexibility as possible with ability to terminate at any time with minimal
commitments;

Do not want tight timelines to deliver products, such as a feasibility study, or to make a
development decisions; and

Want tight transfer restrictions to ensure that they can control as much as possible who their
partner will be if the Junior desires to sell its interest at any time.
However, due to these different priorities, financial capabilities and motivations of the Junior and the
Major, the entering into one of these relationships inevitably leads to tensions in the negotiation of such
option and joint venture agreements. This paper seeks to illustrate the various tension points that
typically arise when a Junior and a Major, and their respective legal counsel, sit down to negotiate an
option and joint venture model such as this, commencing at the stage when the respective geologists of
Major and Junior have consummated a deal in principal. The issues and concepts illustrated in this paper
are those that arise in a North American style mineral exploration option and joint venture model between
parties with different interests and vantage points. While the issues and concepts discussed in this paper
may be common in other jurisdictions (such as Australia), they may not be resolved in the same manner,
or with the same result, and such other models may have other tension points that may be more important
or relevant in those other jurisdictions.
This paper will discuss those issues that arise in the negotiation of a hypothetical two party option (the
“Option”) for an early stage mineral exploration property in Peru where the Major can earn a controlling
interest in the Property. The Junior is a Canadian reporting issuer traded on a recognized stock exchange
in Canada with no revenue. The property is prospective for gold (the “Property”), has had some early
stage exploration work conducted on it, but it does not yet have a defined resource. The concepts
discussed in this paper are applicable to negotiations for other commodities, however, there may be other
issues and focal points for other types of commodities, such as uranium or diamonds, for example. The
Junior is active in Peru with some good experienced personnel, but they do not have the financial or
technical capability needed to materially develop the property into an operating mine. The Major is a
United States based reporting issuer listed on a recognized stock exchange in the United States. They
have numerous operating mines, and therefore have much stronger financial resources and technical
capabilities with an in-house team of geoscientists, engineers, financial analysts, lawyers, community
relations and permitting staff. Also, the Major will have the ability to more easily raise project financing
if required to develop a mine on the Property.
Initial Meeting Between Geologists
In the mineral exploration industry, the first point of contact between the parties, and in this case the
Junior and the Major, would typically be between the respective geologists or business development
personnel of the parties. Commonly, the focus and the goal is for the Major geologist to determine if the
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-3mineral potential is of the size and calibre that the Major would be interested in from a technical view
point. If the Major geologist makes the decision that the particular property of the Junior merits a cash
investment, then the two geologists will set out some basic terms, such the maximum interest the Major
can earn, how much will it cost the Major to earn such an interest, and how long will it take to earn it.
Typically these types of option transactions are comprised of the Major funding 100% of exploration
expenditures on the Property over a certain time period in order to earn a majority interest, and then
completing further work to earn a larger interest, such as expending more funds on exploration or funding
and delivering a report or study, such a scoping study or a feasibility study. During these earn in periods
(also referred to as “phases” or “stages”), the Junior is not required to inject any funds and is “carried”
until the Major owns their maximum interest (which typically ranges from a maximum interest of 60% to
80%), after which the parties will fund all programs pro-rata in accordance with their proportionate
interest in the Property. The geologists may or may not get into details as to how the interest is actually
earned, but will typically discuss operatorship, progress reporting and possibly minimum work
commitments. In general, issues such a title to the property, other representations about the property or
the Junior, transfer restrictions, dilution, Government consents required, community relations issues,
surface access, and project financing are not discussed at this stage. Once the geologists have had a
meeting of the minds on doing a deal, they then sign off on the agreed terms (usually in the form of a nonbinding letter, term sheet or even an email). The geologists then hand the deal over to their management,
who in the case of the Major, will have their in house lawyer take over negotiations, and in the case of the
Junior, will have a business development person or vice president exploration take over.
At this point in the deal, and until the definitive binding agreement is negotiated and entered into, the
Junior may desire to issue a press release if they are a reporting issuer and have regulatory continuing
disclosure obligations. If at this early stage a legally binding agreement has been consummated between
the parties, and if the Property is material to the Junior, then there will most likely be a legal obligation of
the Junior to issue a press release. However if either the transaction has not been made legally binding
yet, or the Property is not material to the Junior, then the issuance of a press release would be voluntary,
and the Junior and the Major would need to agree among themselves if it was an appropriate time to issue
a voluntary press release. In most cases the Major will resist disclosing the details of the transaction until
a formal binding agreement has been entered into, and if the Junior does desire to issue a voluntary press
release, they will need to convince the Major that such dissemination is not overly promotional and that
its dissemination will not harm the parties ability to finalize a legally binding deal.
At this stage there are many issues that have not been determined, and other issues that are uncertain;
some of these are:

Are any of the terms that the geologists agreed to binding?

Who controls the preparation and approval of work programs and budget?

Does the Major have any exclusivity protection until a final agreement is entered into?

Are there any transfer restrictions on the Junior’s ability to sell its interest in the Property?

How does the Junior actually hold the Property, do they have surface access rights to explore and
are there any local community issues?

What are the Junior’s expectations about quickly starting programs on the Property?
These issues and many others will crop up once negotiations for the formal definitive agreement are
commenced, and the different motivations and aspirations of the Junior and the Major will arise that
highlight the tension points that one typically is forced to resolve when entering into a transaction of this
nature.
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-4Formal Negotiation of a Definitive Agreement
At this point in the process, the representatives of the parties designated to negotiate a final binding
agreement typically have outside legal counsel involved to help in the negotiation of, and more
importantly draft, the final binding agreement. The type of agreement that would be negotiated and
drafted would be an Option Agreement, also known as an Earn-In Agreement or a Farm-In Agreement.
This type of agreement would cover the earn in period until the Major earns its first interest in the
Property, or until the Major earns it final interest in the Property, and thereafter the parties would form a
joint venture to jointly develop the Property. The negotiations as to when an actual joint venture is
formed and what form the joint venture will take (whether it is a contractual joint venture, an incorporated
joint venture or some form of partnership), are discussed later on in this paper.
Parties commonly negotiate: (i) both the option terms and the joint venture terms initially, and the
agreement they negotiate can be an Option and Joint Venture Agreement covering the life of the project
(either one full agreement or an option agreement with the form of joint venture agreement attached as a
schedule); (ii) only an Option Agreement that just covers the earn in period, with the joint venture terms
to be negotiated later; or (iii) a hybrid of the two where the earn in period terms are covered, and some
(usually the contentious terms) of the joint venture period terms are agreed to and documented. As in
most cases, time and money dictate what type of agreement the parties end up entering into. The Junior
typically wants to do things fast with minimal expenditure of cash, therefore making the simple Option
Agreement the desired outcome as negotiating a full joint venture at this early stage will take more effort
than the Junior is willing to put in or pay for. The Major will want certainty for the life of the project with
cost and time being less important, therefore making the full Option and Joint Venture Agreement the
desired outcome. The reality for both parties is that the vast majority of these types of transactions never
get to the joint venture stage, therefore negotiating a full joint venture agreement at the initial stages of
the projects may not be desirable for either party. The result is that more often than not the parties end up
negotiating an Option Agreement with list of material terms of the joint venture agreed to up front and
attached as a schedule, or they end up entering into a hybrid Option Agreement that covers the earn in
period but also includes full provisions that cover some of the key features of the joint venture period
phase. For the purposes of this paper, we have assumed that the parties will negotiate and enter into the
hybrid Option Agreement.
Earn-In Terms & Expenditures
In option grants of this nature, typically the Major will require that it earns a majority interest in the
Property with as much flexibility as possible. The Junior will desire to hold on to as much of an interest
as it can, realizing that it will need to provide the Major with a majority interest. In most option grants
then, the resulting structure will be a staged earn-in, where there are two, three or more stages (or phases)
in which the Major earns distinct property interests, and once they complete a stage and earn an interest,
they retain such interest whether they continue with the transaction or terminate it.
For example, after some deliberations, the Junior and Major may agree on the following:

Major has option to fund 100% of expenditures on the Property comprised of an aggregate
funding of $4 million over four years. Upon reaching this required amount, the Major earns a
51% interest in the Property. If it does not, it ends up with no interest.

Major to then fund and deliver a scoping study on the Property within two years of completing
the above mentioned four year program, and on delivery of the scoping study, they earn an
additional 9% interest, for an aggregate 60% interest in the Property.

Major to then fund and deliver a feasibility study within four years of delivering the above
mentioned scoping study, to earn an additional 15% interest, for an aggregate 75% interest in the
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-5Property. In some cases the Major can even promise to deliver a feasibility study with no time
limit if it has enough bargaining power. Upon earning this 75% interest, the parties then form a
joint venture and the parties fund all work programs pro rata.
These terms may or may not have been agreed to by the geologists, however, they still leave the parties
with much to discuss given the differences between the Junior and the Major.
The first issue is that during this initial four years, there is no guarantee on what the Major must spend, so
there is nothing preventing the Major from executing the Option Agreement, then terminating it a month
later with no obligations. To address this, the Junior may demand that there be a guaranteed amount to be
funded, or a minimum commitment especially in the first year, and if the Major terminates in that first
year and has not funding that minimum commitment, then it owes the balance to the Junior.
The second issue is that there is no minimum amount required to be expended in each year of this four
year period, which could result in the Major funding the $4 million at the end of the four year period and
not advancing the Property prior to then. Presumably there will be a requirement to fund minimum
amounts to keep the Property in good standing, but other than that, without a minimum spend each year,
the Major could sit on this Property and then decide in the end not to spend the $4 million and terminate
the Option. Due to the Junior’s desire to advance the Property quickly and keep its shareholders and the
market happy, the Junior will typically demand a minimum amount of funding to be made in each year to
keep the Option in good standing, such as $1 million per year.
The third issue is the type of document that must be delivered, and the time frame in which it is required
to be delivered. Often the Junior wants documents such as scoping studies and feasibility studies to be
delivered on a very short time frame, but the Major will push back to ensure the time frames are
reasonable. In addition many times the actual definition of the document to be delivered is not agreed to,
so that when it comes time for the Major to deliver the document (such as a scoping study), there is an
argument as to what is required to earn the interest. Also terms such as a “positive” feasibility study are
used by Juniors when the Major has no ability to guarantee that a feasibility study will evidence positive
economics. Whatever the true meaning of the term “positive” is, in any case the Major is not going to
agree with including such a reference as the parties have no control over the results of exploration or the
viability of the project; the Major can only assure that it will fund the agreed amounts or will deliver a
study that will contain a resource or reserve calculation or set out the economic viability of the project
(i.e. it could be a large mineral deposit but not an economically viable project, or it could be economically
viable but with small rates of return). The term “bankable” in relation to feasibility studies also is fraught
with uncertainty and can be interpreted to mean that a lender will make a lending commitment based on
the study, or could mean that the study is of a standard of precision and completeness that a lending
institution will give it serious consideration, without having regard to whether funding is actually
extended. Whatever the true meaning of the term “bankable’, in any case the Major is not going to agree
to deliver a study on the former terms to earn an interest, so this type requirement is commonly rejected
by a Major. What the parties may agree to however, is to have any study that is delivered to be subject to
a certain internationally recognized standard, such as those set out in the Canadian National Instrument
43-101.
The parties therefore will typically discuss these matters to ensure that the definitive agreement clearly
sets out the nature of the deliverable. Another common issue that arises is that the Major will often insist
on a reasonable time to deliver a feasibility study, or may insist on no time frame at all, and the Junior
will want to ensure a feasibility study is actually being prepared and the Property is advancing. If during
this “feasibility preparation phase” (which presumably will be more than two or three years, and may be
indefinite) there is no contractual incentive for the Major to start the preparation of a feasibility study
immediately, there is always the possibility that market conditions could change, or that technical results
will be marginal. This may result in the Major delaying the preparation of the feasibility study until the
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-6last possible moment, or shelving the project if there is not enough time to deliver one, with the result that
the Junior could be faced with the Major exiting the project at the last minute, or being stuck with a
property that is not advancing. Therefore the parties may negotiate that the Major must expend a
minimum amount in each year of this phase to give the Junior comfort that the Major is expending funds
towards a feasibility study, or that the Junior as the non-operator can propose its own programs to ensure
the pace of the preparation of the feasibility study continues. However, as the Major is still fully funding
at this time, it will be resistant to these types of clauses unless the Junior is willing to fund its share. As
in all terms of a transaction of this nature, the bargaining power of each party, their willingness to do the
deal, and the technical merits of the Property, will all come into play as to how much the Junior can press
the Major into gaining some comfort on these issues.
Other issues that are commonly discussed under this heading would be what expenditures qualify towards
the $4 million. Are items such as travel expenses to the Property, general and administrative costs for the
Juniors head office in Canada and for its local Peru office, insurance premiums, taxes etc. included in the
total? The parties will need to come to an agreement as to what is or is not included, and qualifying
expenditures are often enumerated in a schedule to the agreement.
Representations and Warranties
Another area that typically is not discussed, nor agreed to, until the preparation of the definitive
agreement are the representations and warranties to be provided by the vendor of the Property (i.e., the
Junior). This area invariably leads to some tensions between the parties. The Major will want assurances
as to title, authority, access and other important aspects of the Property, however, the Junior may be
hesitant to provide extensive representations, either because they have not owned the Property that long
themselves, or they believe that the Major should be doing its own due diligence to satisfy themselves of
the state of the Property.
Title, Encumbrances & Consents
Discussions regarding representations about title to the Property and encumbrances affecting it do not
usually surface until the drafting of the definitive agreement. At preliminary stages of negotiations the
parties are not focussed on good title, as in general that is assumed to some degree. However, once
assurances are sought in a binding definitive agreement and some due diligence is undertaking by the
Major, then the true nature of the title held by the Junior is revealed. In many cases the Junior holds valid
mineral claims, concessions or exploration licences and they are all in good standing and there are no
issues. Other times it is revealed that the Junior does not hold title to the Property, but has an option itself
to earn an interest in the Property from an underlying owner that has not yet been exercised. This leads to
additional tensions if the Major was under the impression that the Junior had title to the property that is
being optioned to the Major. What then ensues is a need to ensure that the terms of the earn-in with the
underlying owner coincide with the deal or the deal must provide sufficient funds for the Junior to
exercise the option with the underlying owner so that the Junior can deliver an interest in the property to
the Major once it is earned. Another concern is that the Major will want to ensure that the Junior keeps
the Property in good standing, and covenants and assurances will need to be inserted to provide the Major
comfort that the Junior will not allow the Property to lapse during the earn in period.
Another issue that frequently arises is whether there are existing encumbrances, such as a royalty held by
a previous underlying owner or due to a governmental authority. These are problematic as the deal
between the Major and the Junior typically will provide that upon a party (which would usually be the
Junior) defaulting on the participation in or funding of work programs (once the carry period is over)
below a certain ownership interest (typically 10%), such interest will be deemed to be converted into a
1.5% or 2% royalty (usually a net smelter royalty). This deemed conversion is typical as once the Junior
dilutes to a low percentage, it is not convenient administratively to continue to have a small minority
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-7partner. With a conversion to a 2 % net smelter royalty by the Junior on such dilution, plus the burden of
a royalty owing to an underlying owner, the aggregate underlying royalties may be too large and render a
mining operation uneconomic. Therefore in such circumstances, the Major will demand that the Junior
negotiate a reduced underlying royalty so that the total royalty burden on the Property is manageable.
Consents of governmental authorities or underlying property owners is another issue that commonly
arises at this time. With many of these mineral tenures, in order to either initially grant the Major the
option to earn an interest in the Property, or deliver that earned interest to the Major once it is earned, the
consent of either the underlying property owner (if there is one), or the consent of the governmental
authority that granted the mineral tenure must be obtained. The Major will typically require the Junior to
obtain any required consents before executing the formal option agreement, or insert a condition
subsequent that such approvals be obtained before the agreement becomes effective.
Surface Access
Depending on the jurisdiction, access to the surface of the Property may be an issue. As the Major is
usually fully funding exploration work programs within a limited time period, it is imperative that once
the definitive agreement is entered into and the earn-in period commences, the Major is able to quickly
access the Property to start exploration. The Major will therefore ask for representations that it can access
the surface of the Property now, however, often the Junior will not be able to make such a representation
due to not having the proper permits, to not having local community approvals or due to there being legal
impediments for a non-title holder conducting operations on such mineral rights. For example, in some
countries, only the holder of the mineral rights can legally conduct operations of the Property, and if the
Major now, or at some point later in the Option, is the operator, it will need to get a power of attorney or
some other authority from the Junior (if they hold title) or the underlying owner (if the Junior only has an
option to earn an interest in the Property), which may result in delays in getting onto the Property. Also if
certain governmental or community consents or permits are needed, this also could result in further
delays. These delays usually cause the Major concern resulting in a request to delay the commencement
of any earn-in period until access is granted. A dialogue will ensue where the Major will either press the
Junior for a guarantee of access within a certain time period, or the parties will agree to not commence the
earn –in period until surface access is granted
Environmental Assurances
As the Major is new to the Property and possibly the country where it is located, the Major will
commonly request certain representations as to the environmental condition of the Property, and that any
activities of the Junior or prior owners were conducted in accordance with all environmental laws. If the
Junior has worked on the Property for an extended time, the Junior may be in a position to provide such
representations. However if the Junior itself has not been on the Property for long because it recently
acquired it, or because the Junior is optioning the Property from an underlying owner, the Junior may
resist providing any representations on the environmental state of the Property or its activities thereon. A
discussion will inevitably ensue where the Major will insist on some sort of assurances in order to avoid
undertaking unnecessary liabilities. Therefore, the Junior will either need to make itself comfortable that
it can make representations about the environmental condition of the Property, or the Major will permit
the Junior to qualify their representations (such as “to the best of its knowledge”) and/or allow the Junior
to have a materiality threshold that their activities are materially conducted in accordance with
environmental laws.
Anti-Corruption Assurances
The area of foreign corrupt practices can also be a contentious issue between the Major and the Junior. In
the current environment where many countries have been updating their foreign corrupt practices
legislation and vigorously enforcing them, Major companies have been instituting tougher policies and
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-8requirements for their employees and their partners to ensure compliance with these increasingly stringent
laws. As a result, when entering into partnerships or joint ventures with Juniors, most Major companies
will require the Junior to represent that it has conducted its affairs in accordance with the applicable
foreign corrupt practices legislation and will continue to do so during the life of the transaction. Junior
companies may or may not resist these requests initially, and may also question why legislation from
certain countries like the United States or the United Kingdom (which in general have stricter
requirements and larger penalties than other jurisdictions) are applicable to them when they are a
Canadian company with a property in Peru, for example. The response would be that the Major is caught
by such legislation by being listed on a stock exchange, being incorporated, or doing business, in a
jurisdiction such as the United Kingdom. In addition, the risk management department of a Major may go
the extra step and require the Junior to fill out a questionnaire designed to flush out any possible issues.
In most cases the Junior can comfort itself in making the required representations and future covenants
with some discussion and education, and then they may require the Major to make the same
representations and covenants, which then the Major has to ensure that it has its house in order to be able
to make such same representations and covenants. If for some reason certain facilitation payments or
other inappropriate payments were in fact made and the Junior has an issue providing these requested
representations, this could then derail the whole transaction as the Major will not be able to enter into a
transaction where such activities occurred.
Budgeting, Control of Work Programs & Technical Committee
One issue that invariably leads to heated discussions is who controls the project in the initial years of the
option when the Major has not yet earned an interest, and how such work programs are to be funded.
Many Juniors desire to keep control of the activities on their lands and will want to have the last say on
work programs and budgets until the Major earns a majority interest. The Major, on the other hand, is
often of the view that if it is initially funding 100% of all expenditures, it should be the one that controls
the preparation and approval of work programs and budgets. Usually the Major prevails in these
discussions, however, the Junior will generally negotiate for some representation on any committee that
prepares and approves work programs (usually referred to as a technical committee), even if in the end,
the Major has the final say. Also the Junior may be successful in requiring a guarantee that the a certain
amount will be expended in any given year, rather than the whole required amount being expended at the
end of the term of the initial option period. Another frequent demand is that the work program and
budget during the first year is agreed to and appended to the Option Agreement so there is no doubt about
what will happen in that first year. That approach also gives each party exposure to and an opportunity to
become comfortable with, the other’s approach to program and budget development prior to cementing a
contractual relationship. If the Junior is the operator, they will also lobby for the right to request cash
calls from the Major in advance of incurring expenditures in order to ensure it has the cash flow necessary
to keep the programs continuing during the initial option term, as the Junior will rarely be in a position to
self-fund programs then seek reimbursement afterwards.
To further protect against the risk of the Major delaying exploration and development on the Property,
Juniors will at times negotiate for the right to propose their own work programs if the Major has not
undertaken a minimum level of work over a defined time period. A question that often arises with respect
to such work programs is whether they are to be sole-funded by the Junior and the impact that such
programs have on the relative ownership interests of the participants.
Some Juniors will also request a right to “challenge” a Major’s propped budget, if the Junior believes it
can achieve a program’s technical milestones more efficiently and at a lower cost. Under these
“challenge” provisions, the Junior can propose a reduced budget. Then, the Major can choose to either
operate the program in keeping with that reduced budget, or hand over operatorship of the program to the
Junior – who will then carry it out under the reduced budget. Majors will strongly resist such “challenge”
provisions, on the basis that they have their genesis in the oil & gas industry, where the costs and
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-9complexities of changing operator from program-to-program are significantly lower than in the mining
industry. Majors will also take the position that part of the reason the Juniors seek to partner with them is
because of the Major’s experience in developing and constructing mining projects. And most Majors do
not take kindly to being second guessed on its budgets by a party with little practical development or
construction experience.
These measures will temper the desire for control by the Junior, but will not quell it. There may be
differences in exploration philosophies and drill location selection, for example, through the life of the
project, especially in the first stage of the project where the Major is still earning an interest but is fully
funding. In the end the Major has the final say in most cases, so it is important that the Junior and the
Major have a good working relationship, as no matter what clauses are negotiated, one cannot impose
cooperation and trust through the drafting of a clause.
Reporting Obligations
As a Junior and a Major have different materiality concerns and reporting obligations, there are differing
requirements for the reporting of a results from a project such as this. The Major may have many ongoing
projects and mines and the results from an option on an exploration stage project are likely not material to
it from a reporting perspective under securities laws. The results of the exploration of the Property may
be material to the Junior however, and if the Junior is not the operator of the programs, it will require
prompt reporting of results. In general the Junior at all stages will desire frequent reporting, while the
Major will not require it, nor will their organization be set up for monthly progress reports on an
exploration property. Therefore the Junior and Major will have to strike a balance of what frequency of
reporting is acceptable to both, and they will need to have procedures in place to inform one another when
material results are obtained.
The Junior will also be required to issue news releases reporting on the status of the agreement and any
material results that are discovered, while the Major may only need to include yearly updates publicly, if
at all. In addition, the Major will want to review and approve any news releases of the Junior that reports
on the Property and the Option Agreement. Option Agreements of this nature will typically have a public
dissemination section that provides that if a party (which is usually the Junior) wishes to issue a news
release disclosing any information on the Property, they must first provide a draft to the other party for
review and any reasonable comments are to be included in the final news release. As parties have to issue
such information in a timely manner, the Junior will try and insist that they must receive comments with a
day or two, while the Major will have concerns as to getting such a news release approved in their
organization and the various department therein. The parties will need to come to an agreement as to how
many days is reasonable, keeping in mind the disclosure obligations that both are subject to, and in
general, these provisions usually provide that comments must be provided within 2 or 3 days, and
thereafter, the party wishing to issue the news release can proceed without waiting any longer for the
other party’s comments. Exceptions to this waiting period are usually included so to allow a party to
immediately make a news release if they are required to do so (in their reasonable opinion) pursuant to
applicable laws and regulations.
The preparation of technical disclosure and technical reports is another area where the requirements of the
Junior and the Major differ significantly. The Junior will from time to time be required to prepare and
disseminate scientific and technical disclosure, as well as technical reports on their property in support of
news releases, or when technical information is being disclosed in documents, such as prospectuses,
annual information forms and information circulars. For Canadian issuers, such technical disclosure and
reports must comply with the requirements set out in National Instrument 43-101 published by the
Canadian Securities Administrators. This technical disclosure must be prepared by (or its preparation
must be supervised by) experts referred to as “qualified persons” (“QP’s”) and technical reports are
required to be authored by QPs. When the time comes to prepare one of these reports, and the Major is
Admin*2121077.4
- 10 the operator, there may be requests by the Junior to use one of the Major’s technical people to act as a QP,
or for the Major to prepare a National Instrument 43-101 compliant technical report. In most cases, the
Major will reject this request as such reports carry personal liability for the QP, and because the Major
will probably not be required to prepare such reports itself. Instead, the Major will request the Junior to
be responsible for its own technical report writing. In such a situation there needs to be provisions for
access to the Property and technical information with reasonable notice. When it comes to the
preparation of a feasibility study in connection with earning an interest under the option, or in a joint
venture where there is no requirement to deliver such a study but it is prepared as part of the advancement
of the Property, the Major may make it clear to the Junior that the feasibility study is for internal purposes
only. That way, when the Junior is required to issue a press release on the findings of the feasibility
study, it will need to commission its own QP to prepare a National Instrument compliant 43-101 technical
report that it can then publicly file as required under the securities legislation. If the Junior desires to use
the feasibility study delivered under the Option (or one that is used to develop the Property) it will need to
negotiate such requirement into the joint venture terms and possibly be required to pay additional fees in
order to use such study.
Minority Protections
During the various phases of the Option, the Major will be the minority interest holder, and once they
earn their initial interest after the initial phase, the Junior will be the minority interest holder, subject to
any future changes due to the dilution of a party’s interest for not participating in work programs.
Therefore it is in the best interest of both parties to have some minority interest holder protections,
although the Junior should be the party most concerned with them as it will be a minority interest holder
for a much longer time if a mine is ever developed on the Property. The discussions between the Junior
and the Major will be in respect of what decisions the minority party will have a say or a veto on, and
until what ownership level they will have such veto.
During the initial stage of an option when the Major has yet to earn an interest (assuming the Major has
not required the Junior to transfer any interests in the Property to it up front, see “Title to the Property”
below for further information) it will insist on restrictive transfer restrictions so the Junior cannot sell or
encumber any interest in the Property. In addition, if the Junior holds such Property in a subsidiary,
transfer restrictions will also be imposed on the shares of such subsidiary. Once the Major earns its initial
majority interest (in our example, 51%) and possibly then or soon after has control of the management
committee or board of directors of the joint venture, the Junior will desire certain minority protections
where certain activities or actions will require their approval. These activities include things such as,
selling or encumbering the Property, issuing shares in the joint venture company or causing the joint
venture to enter into litigation or incurring indebtedness for amounts over a certain value. In addition,
later in the life of the project, the Junior may want a say in the decision to mine, any reduction in capacity
by an amount that is lower than contemplated in the feasibility study, or in the decision to cease operation
or construction for a set amount of time. In cases where the Junior retains a large enough interest, say
40%, then providing them with a veto in certain situations makes some sense. Also, a Junior that has
actually experienced operating mines will have more leverage to influence in some relevant decisions
than a Junior that has only experience doing exploration. However, if they end up with a 20% interest or
less in the end, then the Major will argue that they should have no say in large decisions at that level of
participation. The Major and the Junior will need to negotiate at what level of participation and for what
items the Junior will have a say in the outcome. For instance, with the facts in our example, after the
Option is completed, the Major will have a 75% interest in the Property and the Junior with a 25%
interest. The Major may allow that certain decisions will need to have the approval of the parties holding
greater than 75% of the Property, thus requiring both the party’s approval to make the decision.
However, once the Junior had its first dilution event, resulting in it holding less than 25% and the Major
holding more than 75%, then the minority protections fall away, unless there are unanimous interest
holder support for certain other events.
Admin*2121077.4
- 11 Therefore, in the end the Junior is going to have to decide how long it wants to have a veto in large
decisions, and will have to convince the Major to let them stick around well into the life of the Property to
make such decisions.
Title to the Property
When a Major embarks on earning an interest in a mineral exploration property through an option
transaction such as this, who holds title and when title passes can be a point of contention. On the one
hand, the Major will desire to hold title to the Property possibly at the outset of the Option, even before
they earn an interest in the Property, while the Junior will be hesitant to give up title until the Major has
expended funds on the Property and has earned an interest therein. Who wins this battle will depend on
bargaining power, possible tax issues upon a transfer of the Property to the Major, possible consents
required from governmental authorities or third parties to transfer an interest in the Property, and whether
the Major can hold the mineral title without having an established presence in the applicable country. If
the Major is unsuccessful in convincing the Junior to transfer title to the Property at the outset of the
transaction, then the Major may demand a security interest in the Property or in the subsidiary that holds
the Property or that notice of the option agreement be registered or filed on title to the Property. The type
of security interest or registration available will vary from jurisdiction to jurisdiction, as in many
jurisdictions it is not possible to grant a security interest or a mortgage over a mineral title. If the Junior
is successful in retaining title at the outset of the Option, then the parties will need determine at what
point title passes and how it passes, and this will be one of the issues that dictate the form of the joint
venture (see “Formation of Joint Venture and Joint Venture Vehicle” below for further discussion on
this). In addition, in certain jurisdictions a party cannot be the operator of work programs on a property
without holding title to the property, so the parties will need to consult local counsel to ensure that if the
non-title holder is planning to be the operator on the property, it can legally do so under the laws of that
jurisdiction. In some cases a Junior will hold the title to the property “in trust” for the Major under the
terms of the Option, however in many jurisdictions the concept of holding property “in trust” has no
meaning under its laws, so again the parties will need to consult with local counsel to ensure that the
concepts they agree to are recognized under the laws of the jurisdiction where the Property is located.
Formation of Joint Venture and Joint Venture Vehicle
At some point during the life of the Option, the parties will desire to form a formal “joint venture”,
however, often the parties are not specific on what that term means, or how the joint venture is to be
formed. In general, a joint venture is the cooperation between two or more parties for a single purpose
while retaining their individuality. In a mining joint venture the point where the classic joint venture will
commence is once the Major earns the full interest it can under the Option (here in our example that is
75% once the feasibility study is delivered) and at that point the Junior is no longer carried and is
responsible going forward for its proportionate share of all work programs and budgets. At some point,
the parties will also need to decide the form of joint venture and when it will be formed. The decision as
to what form of joint venture will be is driven mainly by how split interests in mineral properties can be
held in the jurisdiction where the Property is located, and is also tax driven. In some jurisdictions, like
most provinces in Canada, parties can directly hold partial interests of a mineral property and such
interests are recognized in the applicable mineral title registry, thus allowing the parties to form a
contractual joint venture and hold their respective interest directly in the mineral property. In other
jurisdictions, holding split interests in mineral properties is not permitted, and thus the parties are required
to form a special purpose company (a “Joint Venture Company”) to hold 100% of the mineral property,
the parties will then hold their respective interests through shares of that Joint Venture Company, and will
then enter into a shareholders’ agreement to govern that relationship. While the actual joint venture
relationship will start upon the Major earning its full interest and the parties commence pro-rata funding
of work programs and budgets, the Major may want to secure its interest as it is earned, and therefore may
want to enter into a contractual joint venture agreement or form the Joint Venture Company and enter into
Admin*2121077.4
- 12 a shareholders’ agreement upon earning its initial interest in the mineral property (in our example after
expending the $4 million over four years and earning a 51% interest). The Junior may want to resist this,
as it may not want to spend the time and money to negotiate a contractual joint venture or form a Joint
Venture Company and enter into a shareholders’ agreement at a time when there is the possibility of the
Major terminating the Option. Further, although the Major may want to secure its interest in the Property
once it earns its initial interest (assuming it did not require the Junior to transfer some or all of the interest
in the Property on the signing of the Option Agreement), see “Title to Property” above for further
details), it may or may not want to enter into a contractual joint venture or a Joint Venture Company at an
early stage as it also may not desire to incur the time and money to formalize the relationship. Therefore,
the form of joint venture vehicle, and the timing of its formation will be a point of negotiation between
the parties and their interests may or may not align.
Remedies for Defaulting on Work Programs
Once the Major earns its full interest and the Junior is no longer carried, the parties will then be required
to fund all work programs and budgets in accordance with their proportionate share in the Property (i.e.
fund pro-rata). At this point a true joint venture should be established (see prior section entitled
“Formation of Joint Venture and Joint Venture Vehicle”). The parties then need to decide on the remedy
for failure to elect to fund an approved work program. There are many remedies that can be imposed as a
penalty for failure to contribute to an approved work program; these typically are:
1. The dilution of the interest held by the party failing to contribute according to industry
standard dilution formulas (the “Dilution Remedy”);
2. The amount not contributed being considered a loan from the joint venture to the noncontributing party, with such loan being paid back by the defaulting party’s share of proceeds
from the sale of mineral products upon commercial production, at an agreed interest rate; or
3. Forfeiture of the non-contributing party’s interest and deemed conversion to a non
participating royalty.
The remedies above reflect varying degrees of severity. However typically in a North American style
Option Agreement, the Dilution Remedy is used as a consequence of a party failing to elect to fund an
approved work program and budget, however the Major may attempt to negotiate the more severe
remedies set out above.
If the Dilution Remedy is the agreed to consequence, then there will be discussions on how the formula
works and how much credit is attributed to the Junior at the outset, as they did not contribute any funds to
the project during the carried earn in phases (often referred to as “Deemed Expenditures”). The size of
this credit or Deemed Expenditures will affect how quickly a non-contributing party will dilute for each
dollar it fails to contribute, as the larger the initial Deemed Expenditure amount attributed to the
defaulting party, the slower the dilution. As a result, the Junior will typically want this number to be as
large as possible. In addition, with this Dilution Remedy, a more severe dilution will ensue if a party
elects to fund a work program and budget, and then fails to pay the required funds when a cash call is
made to fund the approved work program; a form of penalty or accelerated dilution will be imposed
pursuant to which the defaulting party will dilute at a quicker rate than if they simply elected not to
participate in the first place. The Junior may also insist on a clawback of any potential diluted interest if
the original approved work program that caused the dilution penalty is not completed to some minimum
amount, as it would not be fair for the Junior to dilute if the work program is never completed, or not
completed to a substantial degree by the operator (who at this point will usually be the Major). Therefore,
the Junior will attempt to negotiate that a minimum amount of the work program be complete before the
dilution takes effect (typically in the range of 75% to 100%); the Major will want this minimum amount
as low as possible and the Junior will want it as high as possible. With the Dilution Remedy, typically
Admin*2121077.4
- 13 once a party reduces to a certain amount of Property interest, which is commonly 10% or less, the Major
will desire to have that interest converted to a royalty interest and become non-participating, as
administratively it becomes burdensome to have a minority participating party for all approvals and cash
calls. As a party’s interest gets lower and lower, standard dilution formulas will slowly dilute such party
to lower and lower levels. However, they may never actually get to a 0% interest, so there needs to be a
mechanism to end the participating right of a party at low levels of ownership.
One final issue that occasionally arises in negotiating dilution penalties is how the dilution is practically
implemented. In a contractual joint venture where the parties hold their respective interests directly in the
Property, the changing interest as a result of dilution can usually be adjusted by transferring interests in
the title directly from one party to the other, although if any governmental consents are required to do
this, such consents will need to be obtained in advance or when the transfer takes place. However, in a
Joint Venture Company where the parties hold their respective interests through the share capital of the
company, the parties will need to consult with local counsel on how the respective ownership interests
can be adjusted, and at what price per share, as there could be unforeseen tax consequences if this
procedure is not considered thoroughly.
Restrictions on Transfer
As mentioned in the section on Minority Protections, the Major will insist that until it earns its initial 51%
interest, the Junior will be prohibited from transferring or encumbering any interest (direct or indirect) in
the Property without the consent of the Major. Most Juniors accept that this is part of a transaction of this
nature, but will insist that after the Major earns its majority interest, the Junior will be able to sell its
interest in the Option or joint venture (as applicable) in order to exit and monetize its interest. The Major
would be the natural buyer for the Junior’s interest, therefore the Major should understand this position
and should propose to the Junior that any offers the Junior receives from third parties must first be
presented to the Major to see if they would like to purchase the Junior’s interest at the same price (known
as a right of first refusal). This allows the Major the first right to buy the Junior’s interest, and is also an
important tool to ensure that if the Major does not like the potential third party buyer, or does not have
confidence they have the financial capabilities to be a good partner, they can step in and buy the Junior’s
interest. In some cases the Junior may not think that such a restriction is fair or marketable, and may
attempt to negotiate a right of first offer. A right of first offer means that if the Junior desires to sell its
interest, it would be required to first offer the interest to the Major at a certain price, and if the Major does
not buy the interest, the Junior would be free to sell it to a third party at the same price or greater.
The Major will also want to ensure that these transfer restrictions apply up the corporate chain, so that
they not only apply to the Junior’s interest in the Property (if a contractual joint venture) or its shares in
the Joint Venture Company, but also in the shares of the subsidiaries (if any) that hold such interests. If
the Junior is a company listed on a stock exchange, the Junior will also want assurances that any transfer
restrictions will not apply to corporate control transactions directed to the public shareholders of the
Junior. In addition, the Junior may want the benefit of “Tag Along” and “Drag Along” rights and the
Major needs to consider carefully in what situations and phases they are willing to grant such rights. Tag
Along rights will provide the non-selling party the right to “tag along” in any sale by the other to a third
party, so that if an offer comes in from a third party to a selling party and the non-selling party does not
exercise its right of first refusal, the non-selling party is entitled to sell their interest to the third party
offeror on the same terms and conditions as the original offer. In order for such third party to buy the
selling party’s interest, they must also buy the non-selling parties interest (i.e., they must purchase 100%
of the project). Drag along rights allow the selling party to force the non-selling party to tender its
interest along with the selling party’s interest (again if the non-selling party does not wish to exercise its
first right of refusal) which allows the selling party the opportunity to offer 100% of the Property to a
third party. In general, for the Major, Tag Along rights are manageable as it allows a non-selling party to
be included in a sale by its partner to a third party, so it is voluntary on the part of the non-selling party to
Admin*2121077.4
- 14 participate and exit the project. So if the Major decides to sell, the Junior can tag along on the sale and
exit. If the Junior decides to sell and the Major does not want to buy the Junior’s interest, but rather would
like to exit the project, then the Major can tag along and exit. Drag along rights are more concerning, and
a Major will generally resist providing such rights to a Junior, as the Junior could potentially force the
Major to sell to a third party if the Major themselves do not want to purchase the Junior’s interest. Drag
along rights are typically only provided in those phases where the Major has terminated the option and
holds an interest and where the Junior takes over control.
Transfer restrictions such as those discussed above can lead to heated discussions as one of the end games
of a Junior in transactions of this nature is to sell their interest at some point, and the Junior will be very
sensitive about its ability to sell and how marketable their interest will be to third parties.
Exit/Termination Consequences
The Major will desire as much flexibility on termination as it can get, and the Junior will want to ensure
that it is not left with unpaid liabilities and maintenance payments if the Major decides to exit. In the
initial stage of the Option before the Major earns any interest (in our case earning the initial 51%), the
Major can terminate at any time with no obligation to complete the earn in, but will leave with no interest
in the Property. The Junior may attempt to negotiate some financial assurances so it is not left holding
the Property with monies owing to contractors and governmental authorities. In particular, the Junior will
be especially nervous in the first year, as after initial exploration results come in that could be very poor
and the Major decides to terminate early. In such circumstances the Junior may be left in a difficult
position in the eyes of the market and its shareholders, and could potentially have to pay contractors and
drillers it has lined up if the Junior is the operator. Therefore, the specific financial assurances the Junior
may seek from the Major in the event of termination during the initial stage, may include:
1. Requiring the Major to commit to a minimum guaranteed expenditure amount in the first
year, so that if the Major terminates the Option in the first year, it will pay in cash to the
Junior any portion of that minimum guaranteed amount it had not funded.
2. Ensuring that on termination the Major will be responsible for:
a. any maintenance payments or work commitments required to keep the Property in
good standing for a period of time after the termination; and
b. any contractual commitments that the operator may be liable for pursuant to any
approved work program and budget.
Termination during the phase once the Major has earned an interest in the Property will also cause the
Junior concern that it does not get left with any liabilities as set out in point 2 above. In addition, the
Junior may desire some additional rights upon a termination during these later phases when the Major
will have earned an interest in the Property. If the Option is terminated by the Major, the Major
presumably has made a decision not to advance the Property for various reasons and therefore it will not
be expending further funds on it, so the Junior may desire to continue advancing the Property. At this
point, the Major will have a majority interest, and without having an ability to take control of the joint
venture, the Junior may be limited in its ability to propose work programs and advance the Property.
Therefore, it may want to negotiate one or more of the following on a termination notice being provided
by the Major in these later phases:
1. Switch in operatorship from the Major to the Junior, if the Major is the operator;
2. Providing the Junior with control over the governance of the Property, which may be
providing control of the technical committee, or if a joint venture has been formed, providing
Admin*2121077.4
- 15 control of the management committee of the joint venture or the board of directors of the
Joint Venture Company;
3. Transferring to the Junior a sufficient interest in the Property to provide it with a majority
interest so that it can control the approval of work programs and the joint venture (if
applicable); or
4. Providing the Junior with the right to buy back the Major’s interest with the price being
determined by an independent valuator, or at a price based on some multiple of the total
expenditures incurred to date by the Major.
In addition, at any time upon the termination of the Option by the Major, it should be determined what
work product and technical information is deliverable and owned by the parties, what the ongoing
confidentiality obligations may be with respect to the information about the Property, and whether there is
any cooling off period if the parties agreed to an area of interest around the Property and, if so, how long
the Major will be prohibited from acquiring land in that area of interest for its own accord and in
competition with the Junior.
Conclusion
As mentioned previously, given the nature of the differences between the Junior and the Major in their
financial capabilities, motivations and aspirations, inevitably there will be tensions and apprehensions that
each will have when addressing the issues discussed in this paper and many others that arise in a
relationship such as this. With most transactions of this nature, the parties have come together because the
property they are jointly developing is of economic interest to both, but more importantly the parties
believe that they can work together and have built up some initial trust. As the parties work through the
negotiation of an agreement such as this, they continue to build the trust that will carry on through the life
of the project. Inevitably there will be disagreements and tensions initially when negotiating and drafting
an agreement due to the different priorities and bargaining power of the parties. But if the parties can
reasonably and amicably navigate these tension points during such negotiations so that both parties feel
comfortable, this will go a long way to building additional trust that will carry the parties in good stead
for the life of the project. If the parties cannot resolve these inevitable issues and tension points to their
mutual satisfaction, the project will be doomed from the start, and the chances of discovering and
developing an economic ore body will be almost impossible.
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