Strategies for achieving "Bankability" for
mining projects in Francophone Africa
4th Annual Investing in Africa Mining Seminar - London
Stéphane Brabant, Partner, Herbert Smith LLP
29 November 2010
Contents
I.
General legal environment of a natural resource project in
francophone Africa
II.
Complexity of a mining project
III. What does "Bankability" mean to a lawyer?
IV. Instability and natural resource project
V.
International soft law: a risk for Foreign investors
VI. Some specific risks attached to Africa
Need to know where the project is located
and how it will be financed in order to decide what to do
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A continent of cultural and legal diversity
Like the rest
of the world,
Africa is
a continent of
diversity...
Francophone countries
…with different
influences
and languages
Spanish and Portuguese speaking countries
English speaking countries
Arabic / French speaking countries
Arabic / English speaking countries
A world where 6,000 languages are STILL spoken – a number of them in Africa –
but one international business language, the terms of which can have different
meanings
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An Overview of African Legal Systems
NATIONAL LEGAL SYSTEMS
Common law and civil law traditions
Two legal systems in Africa
(sometimes complemented by
Islamic law or customary law)
Systems based on civil law principles
French legal system (Napoleonic Code)
Portuguese, Spanish and Italian legal systems
(largely based on Roman law)
Systems based on common law principles
Mixed civil law / common law based systems
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Two different legal approaches
(State and Public / Strategic Interest)
Common Law
Civil Law
(Prevalent law governing financing
agreements, international contracts
and a number of Energy/ Natural
Resource companies)
Contractual approach
Law of precedents

Differences in:
• Property law
• Criminal law
• Company law
• Laws on taking
security
• Insolvency law
(Law governing Projects in most
non-English speaking countries)
•
•
•
•
Main source of law:
Written rules
Administrative law and the courts
Mandatory Provisions
Case law (less important/limited
power of judiciary)
• Negotiation (Negotiable
vs. non negotiable)

• Drafting
• Settlement of disputes
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Sub-Regional Organisations within Francophone
West African Countries
OHADA
UEMOA
CEMAC
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Actors of a natural resource project
RESPECT OF HOST STATE’S LEGAL SYSTEM
(Stability – Arbitration)
POPULATION
(Treaties / "Soft law")
- STATE
- NATIONAL COMPANY
Elections
Access to site
MINING COMPANY
(Exploration: Foreign
Investors
Exploitation: Local
Companies)
Contract
Right to
explore/exploit
(titles)
DEPOSIT
(Sovereignty/Res
Nullius/Ownership)
•
SHAREHOLDERS
STOCK EXCHANGE
Strict control
•
BANKS
Security
•
•
•
•
SUBCONTRACTORS
BUYERS
SUPPLIERS
NGOs
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What does a lawyer see when he looks at
a natural resource project?
Necessity for legal clarity where there is factual complexity
DIVIDENDS
HOST STATE
JUDICIARY PRIVATE
ADMINISCOURTS
TRATIVE
COURTS
LEGISLATIVE
EXECUTIVE
ECAs
LOAN
BANKS
$
HOST STATE’S LEGAL SYSTEM
PRIVATE LAW
$
HEDGE AGREEMENT
HEDGE
PROVIDER
ADMINISTRATIVE LAW
BANK
ACCOUNT
$
$
BANK
ACCOUNT
EXPLOITATION PERMITS
MINING/OIL
AGREEMENTS
MINING
COMPANY
DIVIDENDS
INTERNATIONAL
MINING/OIL
COMPANY
EXPLORATION
PERMITS
$
SALE
OFFTAKER
EPC
WARRANTIES
DEPOSIT
HOST COUNTRY
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OFFSHORE
(SUB)
CONTRACTOR
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$
“Bankability”…
= "Likely to Ensure Financial Success" *
… of natural resource projects
= All conditions (geology, prices, political, legal, etc.) for minerals
in the ground to be:
• Explored
• Mined
• Processed
• Transformed
• Transported
• Exported
• Sold…
With "profits" for all "stakeholders": a very (recent) specific
condition required for a mining project to be long term, and thus
“bankable”…
* Source : The free dictionary by Farlex, internet
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From a lawyer’s perspective
1. To identify what banks/ECAs "would" require in order to provide
Project Finance (even if it is not) = the best guarantee for the
project to:
• be a valid / binding / enforceable / long term natural
resource project
• develop within an adequate legal framework for financing
2. It may also be best to first "value" a project as an asset (and to
then find partners, etc.)
The lawyers of the sponsors must work with banks in order to
anticipate what finance lawyers as well as potential partners may
say = is it a "Bankable Project"?
What are the “Laws of the Bank”?
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A Checklist of a "bankable" project
 Check how contract was awarded and approved
 Ratifying legislation
 Signatures by the correct people
 Procurement rules
 Transfers and assignments
 Corruption
 Ability to grant attractive security to Lenders
 What are the risks that the government will seek to renegotiate
terms?
 What is the host state’s history of expropriation, renegotiation,
unpredictable changes in law, arbitrary acts by the government,
difficult government relations?
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Which laws apply (to the project)?
= Legal system of the host state
Civil law / Common law (Hierarchy of norms – Due Diligence)
•
•
•
•
•
•
"Mining" titles (Exploration, Exploitation, Concessions, Chain
of titles) = Security of tenure
Oil and Gas / Mining agreements (Stability – arbitrability;
STATE contract)
Infrastructure
Company law
Security law
Laws of "Public Interest" (labour, tax, expropriation, etc.)
= to know and anticipate the law (and the overall context /
environment) of the project
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Which laws will apply (to the financing)?
= The Law applicable to the Project Financing
The law of the financing (Common law) can be different from the
law of the Project (Civil law) thus requiring a number of issues to
be adapted, including:
•
•
•
•
•
Exchange control regulations (borrowing from non-residents;
offshore accounts; repatriation, etc.)
Security over cash-flows
Security over project assets (shares, equipment, mining rights,
property rights, substitution rights, etc. vs. "floating charge")
Step-in rights and Direct Agreements
Offtake Agreements, EPCs, etc.
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Particular issues in relation to civil law
security
• Type of security package (floating charges, trust structures, fiducie) Practical difficulty in taking local security and ownership issues/rights
• Perfecting security – registration fees, renewal and notification
requirements (particularly for immovable property)
• Enforcement procedures – pivotal and discretionary court procedure
 Transfer of ownership to the lender under court supervision
 Transfer of ownership to the lender pursuant to a contractual
provision (pacte commissoire)
 Sale of the asset at auction and distribution of proceeds
• Enforcement: Necessity for State consent – importance of direct
agreements
• Taking security over foreign bank accounts – exchange control and
repatriation requirements - Cash flows from onshore to offshore
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Bankability and security package (I)
Security Package – pragmatic approach to be adopted by the
banks
Security over mining title
• Mortgage (hypothèque) over the Mining Title (where possible)
• Mortgage (hypothèque) over the land (issues re public
property)
Security over mining agreement
Security over production
• Charge over inventory (nantissement de stocks)
• Charge over movable tangible assets (nantissement de biens
meubles corporels)
Security over shares in local company
• Charge over Sponsor’s share capital (nantissement de compte
d’instruments financiers/de parts sociales)
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Bankability and security package (II)
Security over the business
• Charge (nantissement) covering the business, goodwill,
equipment and facilities
Security over claims
• Charge over bank accounts (nantissement de comptes
bancaires) (restrictions under OHADA)
• Charge (nantissement) or assignment by way of security
(cession à titre de garantie) over trade receivables
Security over non tangible assets
• Trade marks
• Patent
Direct agreements
• Direct Agreement with the State (including step in rights)
• Direct Agreement with key third parties (including step in
rights)
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Bankability – Some key issues
Thorough Due Diligence
Protection under treaties – BITs
Protections built into State contracts
• Stabilisation – do not try to cast the net too wide
• Dispute resolution – but focus on settlement
Direct Agreements
• Correcting title problems
• Approving loans, security interests and hedging arrangements
• Approving offshore bank accounts
• Facilitating enforcement of security
• Approving step-in rights
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Responses to instability
1. Stabilisation provisions
Stabilisation clauses i.e. contractual protection against
subsequent changes to legal regime or certain aspects of legal
regime
• "freezing clauses" – law applicable to contract will not change over
the life of the project
• "renegotiation clauses" – agreement to adjust the economic terms
of the contract (consider when this is triggered)
• "intangibility clause" – agreement by government not to terminate
or amend contract
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Responses to instability
2. International Arbitration
International arbitration
• Avoids local courts
• "Internationalises" the contract
Bilateral investment treaty protection
• Treaties between government of host state and government of
country where investor is incorporated
• May offer additional or different protection
• Political protection
• Consider choosing your investment vehicle
• Expropriation / Creeping expropriation / Fair and Equitable
Treatment
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"Bankability" may depend upon a number of
issues (aside from geology), some of the key
issues being:
•
•
•
•
Volatility of commodity prices
Supply chain risks
Shortage of skilled workers
Escalations in development and operating costs
And:
• HIV/AIDS
• Xenophobia
• Extreme political risks (creeping expropriation)
• Infrastructure related problems (power shortages)
• Changing legislation and regulatory reform
• Physical limit to the number of commercially exploitable resources
available + "nothing available"…
"A booming industry in a changing world"
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International soft law: A “risk” for Foreign
Investors
Executive Summary
1. HRs / States / Multinational Companies (MCs)
2. Thousands of recommendations, resolutions, etc. to/by States and MCs
3. Soft law with hard sanctions (T. Wälde): NGOs, Stock Market, Equator Principles, courts and
reputational risk (new law makers for markers)
4. ISO 26000 and CSR, entry into force on the 1 November 2010
5. International Existing Agreements and Model Mining Development Agreement (IBA) – Draft 4
October, 2010
6. From soft law to International Public Interest (Kenya award 2006)
7. John Ruggie’s initiative or the 3 pillars for protecting HRs:
•
State to protect against HRs abuse by third parties including business
•
Corporate responsibility to respect HRs (to act with due diligence – to avoid infringing rights of
others)
•
Remedy: exploring options at all levels in order to obtain effective remedies
Guidelines for responsible contracting and markers for negotiation (2011)
8. To reconcile protection of foreign investments with treaty obligations on human rights (HRs)
– Arbitration (Argentina – Suez case – July 2010)
From illegal to illicit and from illicit to illegal or HRs: the evolving legal value of an evolving
concept
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Key Challenges arising when investing in
Africa
 Lack of clarity of some energy, mining, company and tax laws and
their interpretation, or no relevant law
 Erratic publication of regulations and case law and lack of
consistency in the interpretation of the law (by local courts and
administrative authorities)
 New trend of "resource nationalism"/creeping expropriation (due to
unstable governments or volatile price of natural resources)
 Implied laws and mandatory laws mean that there may be more
than the contents of the contract
 Difficulty in finding viable local lawyers to advise on international
projects
 Corruption/transparency issues
 Payment default risks for economic transactions with companies in
African states
 Influence of NGOS
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The fundamental risks of an African mining
project
Not all risks can be addressed through intelligent legal drafting
•
•
•
•
•
•
•
•
Political risks / State counterparty
Pricing: commodity prices and worldwide demand
Geological and technology risk
Environmental
Sponsor (importance of due diligence on all stakeholders)
Operational (escalations in development and operating costs, skills
Shortages, infrastructure related (power shortages)
Additional/heightened risks for integrated projects (supply chain,
infrastructure … etc.)
• Reputational risks
• Social risks
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Conclusion
Better than a "Political Risk Insurance":
• "Fair sharing of benefits between the company, the local
community and national governments"
• A well-balanced and drafted contract from scratch
• Legal, licit and legitimate
Resource curse/blessing: an issue concerning all with
consequences for all
The role of extractive industry lawyers
is becoming more and more complex
"Competent counsel can no longer afford
to neglect relevant international 'soft law'"
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