The following article is published with the kind permission of Rev Banque and is a translation of the article originally published in French in Revue Banque n°815-816, January 2018. The original article can accessed here.
Although mining codes and the agreements between the host country and the extractive project operator that complement them do not contain provisions concerning the financial package for projects, they do include clauses that affect the financiers and their intervention capacity.
As soon as they became independent, French-speaking African states with natural resources passed foreign investment laws and drew up legislation specific to the extraction sectors – the mining and oil sectors codes - which have been regularly modified or reformed . The specifics of each extractive project require these codes to be supplemented by agreements, signed between the host country and the extractive project operator, in which the parties’ respective rights and obligations are laid down. The purpose of these agreements is to reconcile the interests of the government, the operator, but also the population, while taking into account economic and geological realities, the existing infrastructure and the infrastructure that will have to be built. Mining agreements, together with the related mining permits and the environmental and social certificate (or licence), constitute the legal keystone of mining projects. These are inherently complex because of the multitude of actors and contracts involved – for example the mining agreements themselves, the contracts concluded between the operator and its various subcontractors, and the financing contracts concluded between the operator and the financiers.
Financing the mining sector: from prospection to exploitation...
Although the mining industry partially finances itself by re-investing the proceeds from the sales of the products it extracts, processes and markets, with the exception of very small projects, self-financing alone is largely insufficient because of the scale of the investment required. External financing requirements vary according to the different stages of a mining project and the financial capacity of the mining companies:
- in the major mining companies, the prospecting and exploration phases are generally financed from their own funds, but smaller companies turn to public offerings because banks are reluctant to finance these usually very risky phases. Several stock markets specialize in junior mining company financing, in particular a market operated by the London Stock Exchange, but also the Toronto and Australian Stock Exchanges. Junior companies also raise finance through private equity funds;
- in the construction phase (or development phase), which occurs after the exploration phase, financial requirements are particularly obvious in very large projects, particularly in the iron ore sector in Africa, as they involve the construction not only of a mine but also of energy, transport and export infrastructure . Such infrastructure can only be financed by bank syndicates, sometimes with the support of international institutions offering preferential rate loans or guarantees relating to the performance of contractual obligations ;
- at the production stage, mining companies either self-finance or rely on banks, since the major risk relates to managing costs and production;
- during the exploitation phase, specialist metals trading companies may also take a stake in the projects and finance their realization in return for exclusive or preferential rights to the sale of the ore.
Although mining codes highlight the desire to develop and exploit the mining sector and to encourage investment, it should nevertheless be noted that there are no chapters / sections devoted to financing mining activities. In fact the codes focus on the mining activity itself, the mining titles, the obligations of the operator and the tax regime applicable to the operator. In terms of legislation, provisions concerning financing can be found in more sparse legislation: the general tax code, the investment charter, bilateral investment protection agreements, bilateral or multilateral tax treaties, OHADA Uniform Act  on securities, law on concessions or public-private partnerships-PPP, etc.
"Infrastructure can only be financed by bank syndicates, sometimes with the support of international institutions."
Ensuring legal certainty
Mining codes and agreements contain provisions that ensure legal certainty for investors.
Mining codes traditionally provide for tax and customs provisions and "stabilization"  clauses which aim to remedy the legislative uncertainties, along with provisions relating to the nature of the mining titles (and therefore the security that can be taken over these mining titles ), the government’s participation in the project (which necessarily affects financing), sometimes the ownership of the areas in the mining perimeter , and the mining infrastructure, supplemented by provisions relating to protection against expropriation/nationalisation, exchange controls, repatriation of profits and the possibility of having recourse to international arbitration.
As far as mining agreements are concerned, financiers are often not party to the agreements concluded between the government and the operator. As a result, these agreements, which, like all agreements, are characterized by their relative effect, do not legally bind the financiers to the government or the operator and contain few provisions relating to financing the projects. Nevertheless, certain provisions in mining agreements are of interest to financiers in that they help to ensure the project’s bankability. The economically modelled mining agreement provisions must enable the project company to achieve a competitive Internal Rate of Return (IRR) in relation to similar mine development projects in order to convince financiers of the project’s economic viability and bankability.
Although the first generations of mining agreements contained few financing provisions in addition to those provided in mining codes and other legislation, recent generations, such as the Mining Development Agreement Model (MMDA) , contain more detailed provisions about the guarantees offered to investors in matters of security, land, exchange controls, repatriation of profits, etc., and seek to facilitate financing. Mining agreements also increasingly frequently contain provisions covering respect for the environment and the social impact of projects, which are required by financiers. For example, international mining companies must adhere to the Ecuator Principles , which are social and environmental standards for the financial sector that apply in the context of project financing; the most recent mining agreements expressly refer to them.
Mining agreements may also provide that, in addition to the provisions of national laws, companies undertake to comply with the directives and good practices laid down by international institutions , as well as provisions relating to fighting corruption (explicit references to the UK Bribery Act and the Foreign Corrupt Practices Act - FCPA) and transparency (notably EITI  standards). Similarly, the rights of communities established around mining sites are taken into account  and companies ensure that they derive economic benefits from mineral exploitation  while ensuring a healthy environment and respect for human rights.
Agreements between operators and financiers
Mining codes and agreements make it possible to organise contractual relations between the operator and the financiers.
Mining agreements, which are framework agreements, often provide for the existence of other agreements and contracts concluded between the parties to the mining agreement, but also between the operator, party to the mining agreement, and third-party financiers. The mining agreement may thus provide for the existence of the articles of association of the Mine Operating Company (MOC) in which the government has a free shareholding  (and often an additional shareholding subject to payment), a shareholders' agreement between the government and the operator, specifying the provisions in those statutes and organizing relations between the shareholders, and also financing agreements, expressly described as agreements concluded with third parties for the purpose of financing the project or the MOC. The articles of association and the MOC shareholders' agreement often provide for more detailed provisions relating to financing the MOC by the operator, third parties and sometimes the government, which are of interest to financiers, as well as provisions relating to disposals of titles and securities on these titles, in the event, in particular, of a possible step-in. The mining agreement may also anticipate the rights of financiers by providing for the existence of financing agreements and certain provisions in these agreements may take precedence over the provisions in the shareholder agreement, the statutes, or even the agreement subject to mandatory provisions of the law of the host country.
"Mining agreements also increasingly frequently contain provisions covering respect for the environment and the social impact of projects, which are required by financiers."
What the mining codes and agreements don't say...
Mining codes and agreements do not contain provisions relating to projects’ financial packages. It should be noted, however, that although all these clauses are intended, on the one hand, to reassure financiers and limit their risk and, on the other hand, to organise legal relations between the government, the operator and the financiers, they do not under any circumstances give details of the project’s financial package or debt structuring. Although each project is of course subject to prior financial modelling, the codes, and often the mining agreements, do not mention it.
In the oil industry, some codes provide for financial modelling to be attached to the production sharing contract. Likewise, although the key to the success of a large number of mining projects is often the infrastructure, mining codes and agreements are frequently silent as regards the financing of the infrastructure  to be built. The realisation of infrastructure at competitive costs  (compared to other similar projects in other countries) is therefore particularly important, notably in the context of the international volatility of ore prices. Only projects with competitive operational costs are likely to be realised and the cost of the infrastructure is a major component in operational costs. Mining codes and agreements do not however cover these subjects.
Attorney at law - Paris Bar
Member of the executive committee of the Africa / OHADA commission of the Paris Bar
Deputy Managing Director
Vice President of the Mining Federation of the Republic of Congo ("Fédération des Mines Solides du Congo")
- See chapter "Reform of mining codes and evolution of the regulatory environment of the extractive sectors in Africa" written by Ludovic Bernet and Florent Lager in the 2017 ARCADIA report, Economica, p.55
- See Emmanuel Yoka and Florent Lager (2016), "Investment in infrastructure is a prerequisite for project development in the Congo", in the Journal de la direction des affaires juridiques du ministère des Affaires étrangères et de la Coopération du Congo, special issue, April.
- See pages 291 and following of the book by Thierry Lauriol and Émilie Raynaud, Le Droit Pétrolier et Minier en Afrique, published by LGDJ, 2016.
- Organisation pour l’Harmonisation en Afrique du Droit des Affaires OHADA- Organization for the Harmonization of Business Law in Africa
- Bertrand Montembault (2003), "The Stabilisation of State Contracts Using the Example of Oil Contracts. A Return of the Gods of Olympia?” International Law Review No. 6.
- Thierry Lauriol and Tomasz Gawel (2001), "Legal Aspects of Creating Security Interests over Mining Titles in the States Parties to the OHBLA", International Law Review No. 2, p. 175
- Ludovic Bernet, Florent Lager and Gilbert Itoua (2014), "Securing land in the framework of mining projects", Centre Africain pour le Droit et le Développement (CADEV)-COJA.
- Established under the auspices of the International Bar Association (IBA) with the participation of civil society and academic groups, the MMDA is available on http://www.mmdaproject.org.
- For example, the Performance Standards and the Sustainable Social and Economic Development Policy developed by the International Finance Corporation, the recommendations of the International Council on Mining and Metals (ICMM), the guidelines of the Organisation for Economic Cooperation and Development (OECD), etc.
- Extractive Industries Transparency Initiative: https://eiti.org.
- For example, in the Republic of Congo Law No. 5-2011 on the promotion and protection of the rights of indigenous peoples.
- World Bank (2011), Sharing Mining Benefits in Developing Countries", Extractive industries for development series, 21 June
- Mining codes generally provide for government participation in the mining company for no payment, which is described as "free carry" (around 10 to 15%).
- In some French-speaking African countries there is specific legislation relating to public procurement, PPP concession agreements (such as public service delegation) and PPP non-concession agreements (such as PFI or partnership contract).
- Olivier Fille-Lambie (2001), "Legal Aspects of Project Financing as Applied to Public Utilities in the OHBLA Zone", International Law Review No. 8.
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