08 August 2017

Accessing exploration and development funding through strategic alliance agreements

This article was written by Robert Edel. 

As everyone in the mining industry knows, there is currently a significant shortage of high-quality exploration projects across a number of key mineral commodities, including gold, copper, lithium, zinc and cobalt.

This shortage is a result of a long downturn in exploration activity following the Global Financial Crisis in 2008 and the abrupt closure of debt and equity markets to the junior and mid -cap resource companies that followed.

However, nearly 10 years on, the market is turning and many of the global resources companies are now once again on the lookout for high-quality exploration projects in those key mineral commodities.

Despite the fact that most analysts agree that the equity market for junior and mid cap companies is slowly recovering, equity is still relatively hard to come by for that part of market.

One way that junior and mid cap companies are accessing exploration funding is by way of farm-in, joint venture and strategic alliance agreements with the larger mining companies. We are seeing significant numbers of these types of arrangements being announced in the market as the major players in the mining industry begin to look for new sources of supply.

Many large mining companies are significantly reducing their exploration teams, along with their exploration budgets. Instead, many of these companies are looking to enter into farm-in and joint venture agreements or strategic alliance agreements with explorers as a way of gaining access to promising exploration ground. In effect, the exploration function in some large companies has effectively been outsourced to the junior end of the sector. There are a number of global mining companies that enter into anywhere between 20 and 50 farm-in and joint venture agreements each year across a range of commodities and a range of different jurisdictions in the search for the next significant mining project.

This, of course, provides opportunities for junior and mid cap companies but care will need to be taken with the preparation of the relevant agreement.

Farm-in and joint venture agreements are well known in the mining industry. However, Strategic Alliance Agreements (although they have been around for a long time) are becoming more popular.

These agreements are often used in circumstances where a company has identified a prospective region for exploration but has not yet obtained exploration or mining licenses over any particular prospects. Many such agreements will provide that one party will fund the other party to conduct early-stage exploration, identify areas suitable for pegging, apply for the relevant tenure and then conduct an exploration program with a view to proving up a resource. Once tenure has been obtained parties commonly enter into some form of joint venture. 

A common feature is that the parties agree to extend the arrangement over a so-called "Area of Interest". The Area of Interest can sometimes be very extensive and the net result is that the party acting as the explorer will be bound to offer to the funding party any opportunity it identifies or tenure that it obtains in that area.

Accessing funding in this way is extremely useful, particularly in circumstances where the exploring company has limited access to funds to enable it to obtain tenements or licenses to explore. However, care will need to be taken in developing a regional exploration approach.

In particular, the funding party will often be seeking to ensure that the individuals involved in the exploring company are locked into offering the funding party any opportunity they identify in the Area of Interest as well. This is understandable because if the individuals are not part of the arrangement it would be easy for them to subvert the intent of the agreement if and when high-quality exploration targets are located.

However, those individuals will need to be careful if the Area of Interest is geographically or geologically significant. For example, if they are involved as directors of other companies that may be active in the area or become active in the future, they may find that their obligations under the Strategic Alliance Agreement provide a source of conflict with their fiduciary obligations as directors of other companies that are either active or are moving into the area.

Another issue that commonly arises is the length of time that the Area of Interest obligation applies. There are a number of potential issues that can arise here:

  • It will be important to ensure that the SAA has a clear termination regime and does not last indefinitely. Failure to include a termination date and/or termination rights can lock one party into an agreement in circumstances where the arrangement is become highly inconvenient or difficult.

  • Many such agreements will seek to impose some form of obligation to refer exploration opportunities within a set period after termination. Again, this is typically included as an "anti-avoidance" measure but can create significant difficulties for the exploring party.

  • It will be important to ensure that the parties are clear on whether any fiduciary obligations are imposed upon each other or not. Fiduciary obligations can arise in many different ways and impose an extremely high standard of conduct and can often be inconsistent with the pursuit of one party’s commercial interests.

Lastly, it is important to set out clearly the precise nature of the exploration targets that are the subject of the arrangement. For example, other parties setting up an arrangement that covers all minerals? Or are they free to enter into arrangements to explore for certain minerals in joint venture with other parties? If so, what happens if one party discovers minerals subject of an SAA whilst exploring for other minerals pursuant to a separate joint venture arrangement?

These issues are all capable of straightforward resolution but illustrate the importance of thinking through the implications of a Strategic Alliance Agreement with the strategic partner and the importance of clearly documenting the outcome.

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