The Role of Mining Development Agreements (MDAs) and their Implications

A Mining Development Agreement is a contract that governs the relationship between governments and a licence holder for the exploration or mining of certain minerals in exchange for royalties, taxes and other obligations. Mining Development Agreements provide a scope based on the objectives of a particular government to achieve its desired goals. Such objectives may include the following but are not exhaustive:

1. To provide free-carried interest and state participation in long-term mining projects.

2. To amplify the legal responsibility of the investor to guarantee the procurement of goods       

     and services that are available in the country

3. To guarantee the fiscal stability of a long-term mining project in a country

4. To guarantee the employment and training programme for citizens and providing

     succession planning in relation to expatriate employees.

5. To articulate environmental matters, including in respect of matters which are project

     specific and not covered by regulations of general application

                                 1.  Specific Agreements to be considered.

Some considerations are taken into account in specific agreements that are frequently negotiated in the mining industry. Development agreements allow preliminary access to mining properties and the review of their potential with the possibility of acquiring them, royalty and others may also represent an alternative to traditional financing mechanisms.

                                2. Joint Venture agreements (JV)

Mining companies may enter into joint venture agreements for specific reasons, which may range from a situation where the original property owner does not want to give up its ‘ownership rights’ entirely and keep a stake in the property, to cases where it is desirable to a partner that has familiarity with certain technology that will be useful in the mining project. However, the main reason for joint ventures in the mining sector is the need to share the risk of the project, in addition to sharing the costs, which are usually very significant.

The main legal aspect of JV agreement is that liabilities will be limited to the joint venture company. and that the title to the mineral property is usually transferred to the joint venture company. This may vary during the life of the Mine. On the other hand, the agreement may provide for mechanisms where one party may increase its interest upon the accomplishment of specific milestones. Usually, joint venture agreements contain a provision whereby if a party is diluted below a certain minimum interest, its interest is converted into a royalty. In this case, the minority party will exit the joint venture and will become a royalty holder.

                                3. Royalty and Streaming agreements

Royalty and streaming agreements have a purpose of serving as an alternative means of getting access to funding.

                        (a) Royalty/Production Sharing agreements

Royalty agreements provide for the right of a party to participate in the results of a mining operation, either by receiving a percentage of the production in cash or otherwise.

This agreement ensures that the right to mine is not lost, so compliance with legal and production requirements is a major requirement.

Royalty agreements may have different origins. In other cases, it works as a financing mechanism so that the royalty holder advances funds to the mining company to be used in the development and construction of the mine. In project financing, the royalty holder assumes part of the risk of the project, since its remuneration depends on the mining company successful production. However, the royalty is usually represented by a share of production through the Life of Mine (LOM).

Royalty agreements usually have inspection mechanisms and access to information to allow the holder to verify if the royalty has been properly calculated and if the deductions were allowed, including the right to call for audits. These agreements also restrict the ability of the property owner to sell it without the royalty holder’s consent. There may be a requirement for a minimum payment if production has not reached a certain level, or if the property has been put under care and maintenance.

                     (i) Mining Development Agreement (MDA) on Globe Metals and Mining in Malawi

Globe Metals and Mining has entered into a Mining Development Agreement with the Malawi government to develop the Kanyika Niobium Project. Under this MDA, Globe Metals and Mining has the right to mine niobium, tantalum and deleterious uranium from the project and establish a processing facility in the Mine area of Malawi.

Royalty/Production sharing Agreement may be applied to the newly signed Global Metals MDA in Malawi. Under this MDA, the Malawi government will receive at no cost,a non-diluting 10% equity interest and an option to buy another 10% for Fair Market value of the Capital of the company (in aggregate) upon completion of construction, commissioning,and operation of the project having satisfied the Completion test imposed by the Project Lenders. This will be served in writing by the Company to government.The government will also receive 5% statutory royalty on all revenues earned from the mining and processing of the ore.

                       (b) Streaming Agreements

Streaming arrangements are contracts for the ongoing supply of mineral production under which, upon advance payment of a premium, the buyer agrees to purchase, at a fixed, discounted price, part of the mineral production from a property. The stream may last during a certain period or even throughout the life of the mine. The mining company receives an upfront payment, which enables it to develop, construct and operate, or expand, the mine.

Streaming serves as a fundraising mechanism to develop a mineral project and arrangements also enable mining companies to minimise their risk of dilutions to shareholders.

                          4. Option agreements

Option agreements are usually employed by junior exploration and mining companies that have access to markets and capital when dealing with local property owners that do not have the funds or the expertise, or both. Such agreements are also used by mid-tier companies.

Option agreements are frequently employed with regard to properties that are at the exploration stage. On one side, the owner of the property needs funds to meet expenditure requirements and to perform exploration works within a certain time frame usually imposed by the law. On the other side, a mining company undertakes to meet expenditure goals and to perform certain works in order to have the right to acquire the property, or to enter into a joint venture with the property owner.

Given the limited amount of geological information available, option agreements usually provide for expenditure commitments of the mining company, within certain time limits, possibly in stages. If the expenditures of the first period are achieved, the company has the option to progress to the next stage, where further expenditures will be required. This means if further geological information becomes available, the company can decide whether to move to the next stage or not. Milestones are usually expressed in expenditure amounts, although periodical payments to the property owner may be required to progress from one stage to the other. Other milestones may include reports on resources and reserves, or even feasibility studies.

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