Copper, cobalt, and lithium prices rise, and countries join the battle for mineral resources
International Business News – In recent years, with the rapid development of the new energy industry, the prices of copper, cobalt, lithium and other related raw materials have continued to rise, and countries have joined the battle for mineral resources. As one of the regions with the richest mineral reserves in the world, Africa has become a key area for countries to compete for resources, but disputes have also increased.
Dai Ying, a special legal expert from the Going Global Think Tank (CGGT) and a partner of Zhou Tai Law Firm, pointed out that in the past ten years, African sovereign countries have accelerated the legislation and amendment of natural resources development, and forced to increase the proportion of state-owned shares or local shares , strive to keep more of the profits from upstream and downstream mining development within the country. And some large state-owned African mining companies, including Gécamines, are also trying to renegotiate mining agreements and shareholder agreements with foreign investors in joint ventures. This will cause anxiety among foreign investors for some time to come, leading to an increase in the number of international arbitrations.
How do Chinese companies deal with disputes over mineral resources in Africa? Today, the Going Global Think Tank (CGGT) published an article by lawyer Dai Ying for the reference of readers who are concerned about mining investment in Africa.
1. Mining development is characterized by a long cycle, huge investment and high risk. Many African countries do not have the conditions for independent development and often need to introduce foreign investors. However, when the uncertainty of mineral development increases, new investors are introduced, existing investors withdraw, control rights change hands or shares are diluted, friction is likely to arise.
2. When there is a dispute over the transfer of equity in a mining joint venture development company, the most important thing is which party’s interests are represented by the shareholders with opposing opinions, which directly determines the direction of dispute resolution.
3. In order to avoid protracted and costly international disputes during and after the equity acquisition, we recommend that Chinese investors join an existing mining joint venture company,and in view of the disputes that may arise when the new and old shareholders are replaced, a comprehensive consideration should be made. Before the acquisition, it is recommended to carry out detailed due diligence.
With the continuous and vigorous development of the global new energy industry, major economic powers and multinational giants of new energy have stepped up the development of upstream industries, which has also caused violent fluctuations in the prices of bulk products including lithium, copper and cobalt.
Chinese companies started to deploy mining resources in Africa later than in Europe and the United States. At present, the top ten multinational companies in African mining are still Western faces, they are: Anglo American, Rio Tinto, Brazil’s Vale, BHP Billiton, Canada’s Barrick Gold, and the United States Freeport McMoran Copper and Gold Mining Corporation, Newmont Mining Corporation of the United States, Teck Resources of Canada, Gold Corporation of Canada and Alcoa Corporation. When Chinese-funded enterprises enter the market strongly, it will inevitably lead to a rebalancing of the strategic map of mining investment.
The scope of this article is limited to disputes arising from the acquisition of equity interests in existing mining joint ventures in Africa by Chinese investors.
01. The alternation of old and new shareholders can easily trigger the terms of “preemptive right” and “equity transfer restriction”
Zijin Mining announced publicly on May 7 that recently, Congo (DRC) Mining Minister Nsamba is about to sign a ministerial decree granting the Manono Lithium Mine mining license to Dathcom Mining Company. Zijin Mining acquired a 15% stake in the Manono lithium mine by transferring part of Dathcom’s stake held by the Congolese (DRC) National Mining Development Corporation (COMINIERE).
However, around this world-class lithium mine, the stake competition between Chinese companies and Australian companies has not yet come to an end.
The Manono Lithium Mine is one of the largest lithium-rich LCT (lithium, cesium, tantalum) pegmatite deposits discovered in the world that can be developed in the open pit. The latest report shows that its total resources reach 401 million tons. The mine is 100% owned by Congo (DRC) Dathcom. Dathcom is a joint venture company established in 2016. After several supplementary agreements were signed, in 2017, Australian AVZ International, Congo (DRC) National Mining Development Corporation (COMINIERE) and Dathomir Mining Resources Co., Ltd,（ SARL) holds 60%, 25% and 15% of the shares respectively.
During the equity transfer negotiation from July to September 2021, COMINIERE agreed to transfer its 15% stake and signed an agreement to enable Jincheng Mining, a subsidiary of Zijin Mining, to obtain a 15% equity interest in the lithium mine project, but the acquisition was greatly affected shareholder AVZ strongly opposed and obstructed. Congo (Kinshasa) local court ruled against AVZ twice and supported the equity transfer. AVZ revealed that it recently received a notice of Jincheng Mining filing an arbitration application with the International Chamber of Commerce (ICC) (Paris), requesting confirmation that Jincheng Mining holds 15% of Dathcom’s shares.
Mining development is characterized by a long cycle, huge investment and high risk. Many African countries do not have the conditions for independent development and often need to introduce foreign investors. However, when the uncertainty of mineral development increases, new investors are introduced, existing investors withdraw, control rights change hands or shares are diluted, friction is likely to arise.
AVZ stated that the equity transfer of COMINIERE violated the pre-emptive rights of shareholders in the original agreement, while COMINIERE believed that the transfer was carried out in compliance with the terms of pre-emptive rights. Since the agreements signed by several parties are kept confidential, and the local courts in Congo (DRC) have not released relevant judgment documents, we can not directly analyze the rights and interests of the Manono lithium mine on a case-by-case basis, but we can see that the focus of the disputes between the two parties is on the “right of first refusal” on the issue.
In 2016, another case of a Chinese company spending a fortune on an acquisition in Africa also caught the world’s attention– China Molybdenum Co., Ltd, spent $2.65 billion to acquire a 56% stake in Tenke Fungurume Mining (TFM), a joint venture company in Congo (DRC). The TFM joint venture was established in 1996 and holds the world’s largest and best quality copper-cobalt mine development rights.
CMOC was also challenged by the “right of first refusal”. In this acquisition, the obstruction came from Gécamines, a shareholder representing the Congo (DRC) government (founded in 1906 and later became a 100% state-owned mining giant in the DRC). Gécamines owns a 20% non-dilutable stake in TFM, and it believes that Freeport-McMoRan Inc of the United States has violated its right of first refusal by selling its interest in TFM without its own consent.
From the establishment of TFM in 1996 to before the acquisition by China Molybdenum Industry in 2016, there were mainly two equity changes in the middle, in 2005 and 2010. Among them, in 2010, the non-dilutable share ratio of Gécamines in TFM was increased by 20% from 17.5%, and supplemented some of the contents of the mining agreement, while most of the terms of the 2005 shareholder agreement and the mining agreement have been inherited.
The 2005 TFM Shareholders’ Agreement (Revised Edition) is a public information. The author retrieved the specific terms of the agreement. Article 15.4 the right of first refusal restricts the transfer of shares by shareholders to non-shareholder third parties (Good faith third party, third party offer will be irrevocable within at least 80 days), shareholders who transfer shares must send a copy of the third-party offer to all other shareholders, and make an offer from the transferor with the same conditions, and other shareholders have the right of first refusal within 30 days.
However, the 2005 TFM Shareholders Agreement also made a special agreement on the transfer of equity, namely, “Article 15.8 Lundin Holdings Ltd allows the transfer to the development entity. Without prejudice to Article 9.5, notwithstanding anything to the contrary in this Article 15 ,Lundin Holdings Ltd may transfer the shares to any multilateral development entity, including but not limited to the International Finance Corporation, Industrial Development Corporation (South Africa) and CDC Group plc, to facilitate project financing. Any neither of these assignments is subject to the pre-emptive rights of other shareholders as set out in Article 15 of this agreement or the (Company’s) Articles. In such event, T.F.M. will notify Gécamines in accordance with Article 5.1(b).” Evident as long as Lundin Holdings Ltd (renamed TF Holdings Ltd. in 2010) is to transfer its shares to a multilateral development agency, it can break through the restrictions on the preemptive rights of other shareholders in the general terms, and the obligation to Gécamines is limited to notification.
According to reports, Gécamines filed an international arbitration against Freeport-McMoRan at the ICC (Paris) in 2016, requesting to exercise the right of first refusal to purchase a 56% interest in TFM indirectly held by Freeport-McMoRan Inc. But it was questioned that it did not have the financial capacity to make the acquisition happen.In the end, CMOC successfully obtained a 56% equity interest in TFM.
However, it should be pointed out that the TFM shareholder agreement clearly stipulates that TFM shares are divided into A\B shares. Gécamines is a Class A shareholder. Although it only holds 20% of its non-dilutable shares, it does not need to undertake financing obligations. At the same time, it has 2 seats on the designated board of directors and special rights such as the appointment of a vice chairman; the remaining shareholders are Class B shareholders. Although CMOC has acquired 80% of TFM through two acquisitions, it is still a Class B shareholder and is subject to the checks and balances of Class A shareholders.
In addition to the “right of first refusal” clause, the agreement may also stipulate other restrictions on equity transfer during the joint development of such minerals, such as the prior written consent of other shareholders. In the supplementary agreement on the joint venture (cobalt alloy waste treatment plant) signed by Gécamines and Group George Forrest S.A. (Luxembourg company) in 2013, under the general clauses (dispositions générales), there is a special “equity transfer restriction clause”, namely:
“3.1 Unless there are special clauses (stipulations) in the framework agreement and the operating documents defined in the framework agreement, neither party shall sell, transfer, mortgage, distribute the holdings in any form without the prior written consent of the other party shares in the joint venture.
3.2 Unless there is a special clause (agreement) in the framework agreement and the operating documents defined in the framework agreement, the provisions of Article 3.1 shall not apply to the sale or transfer of shares to a party’s related party (ie, the party’s subsidiary or parent company) circumstances, provided that the sale or transfer is of all shares and is legal and requires a partial reorganization.
3.3 All transfers other than those specified in Articles 3.1 and 3.2 must obtain the prior written consent of all. For the avoidance of doubt, all assignments pursuant to articles 3.1 and 3.2 shall not affect the Contract of Guarantee and the rights under the Contract of Guarantee. ”
02. Dispute Resolution Track for African Mining Acquisition Disputes
The specific content of each investment-related agreement will reflect individual differences. In addition, different host countries have different negotiating positions in different transactions. Investors and host countries have different degrees of reliance on local judicial systems and international investment dispute settlement institutions at different times. Whether the host country and the investor’s home country have signed a bilateral (multilateral) investment agreement and concluded relevant international conventions is different. The existence of these variables makes the choice of dispute resolution very different.
From the above cases, it can be seen that when a mining joint venture development company has an equity transfer dispute, the most important thing is which party’s interests are represented by the shareholders with opposing opinions, which directly determines the direction of dispute resolution.
In the case of Zijin Mining and AVZ Lithium Mine, AVZ’s objection at first was mainly aimed at the transfer of COMINIERE, a Congolese (DRC) national mining development company representing the interests of the host country. It revolves around corporate governance issues (holding of shareholders’ meeting, revocation of resolutions of shareholders’ meeting). At this stage, Zijin Mining’s identity has changed from a “transferee third party” to a new shareholder, confronting AVZ face-to-face, and by filing an international arbitration with the ICC for equity transfer confirmation (investment entity issue) to completely resolve the Manono lithium mine development rights reassign the problem. From this dimension, disputes exist between two different foreign investors.
The dispute over the acquisition of TFM equity by China Molybdenum Industry occurred between foreign investors and state-owned enterprises representing the interests of the host country. Fortunately, China Molybdenum Co., Ltd has included TFM’s equity in the bag. The copper-cobalt mixed mine project is expected to be put into operation in 2023. After reaching production in the future, the company expects to increase the average annual output of copper by about 200,000 tons and the average annual output of cobalt by about 17,000 tons. Ton.
When a new investor conflicts with an existing investor or with the host country, the dispute resolution method may not be the same, but from the perspective of the safety of foreign investors, the choice of international arbitration is basically a consensus.
We can take the disclosed 2005 TFM Shareholders’ Agreement as a reference. Article 16 of the agreement makes the following stipulations on dispute resolution:
● 16.1 Settlement
In the event of a dispute arising out of, in connection with, or in breach of this Agreement, the parties to the (dispute) issue shall convene a meeting to attempt a negotiated settlement before submitting the dispute to arbitration or judicial proceedings, except in emergencies. To this end, the president of the parties concerned (or their proxies) will convene a meeting within 15 days after receiving an invitation from the most diligent party. If the meeting is not held within the stipulated time, or if the dispute is not resolved by a written agreement signed by all shareholders within 15 days of the meeting, either party may submit the dispute to arbitration or bring a lawsuit in court pursuant to Article 16.
● 16.2 Arbitration
(a) Binding Arbitration. All disputes or claims or breaches arising out of or in connection with this Agreement which are not resolved in accordance with Clause 16.1 above shall be resolved in accordance with the International Chamber of Commerce (ICC) Rules of Arbitration by the appointment of 3 arbitrators, the seat of arbitration shall be Geneva, Switzerland . The arbitration will be conducted in French and English. The arbitration award shall be in writing and shall be final in French and English and shall be binding on both parties. As the case may be, the validity of an arbitral award that has been made may be made by a court of competent jurisdiction, or an application may be made to such court for recognition and enforcement of the arbitral award.
(b) Decision. The arbitrator’s award decision will be final and binding on the parties immediately upon notice to the parties in accordance with Article 17 of this Agreement. The award decision must clearly state the arbitrator’s decision on each issue submitted to them.
● 16.3 Disputes with the host country
If a party believes that the Dispute has a nexus to a dispute under the Amended and Restated Mining Agreement between one or more parties and the host country, it must first submit the nexus issue to arbitration pursuant to Clause 16.2. If the arbitral tribunal confirms this connection point in the arbitral proceedings in accordance with Article 16.2, the latter must declare itself without authority (jurisdiction). In such a case, the most diligent party may, in accordance with Articles 25 and 26 of the Amended and Reaffirmed Mining Agreement, jointly submit the two disputes that are deemed to be connected to the International Centre for the Settlement of Investment Disputes (ICSID), which Gécamines must accept jurisdiction. If the arbitral tribunal conducts arbitration in accordance with Article 16.2 of this Agreement and finds that there is no connection between the two disputes, the two disputes shall be subject to the arbitration procedure set out in Article 16.2 and Articles 25 and 26 of the Amended and Reaffirmed Mining Convention respectively provisions concerning disputes in question are resolved individually.
● 16.4 Jurisdiction
(a) Judgment on an arbitral award that has been made (effectiveness) may be made by any court of competent jurisdiction, or an application may be made to such court for recognition and enforcement of the award, as the case may be.
(b) all disputes or claims arising out of or in connection with this Agreement or a breach of this Agreement, when the arbitral tribunal described in Article 16.2 or Article 16.3 (and Article 6.6) declares that it does not have jurisdiction ( Unless the arbitral tribunal referred to in Article 16.2 has been declared non-jurisdictional under Article 16.3, in which case the arbitral tribunal referred to in Article 16.3 will have jurisdiction), the jurisdiction of the courts of Geneva, Switzerland shall be solely .
● 16.5 Waiver of Execution Waiver
Gécamines hereby waives any immunity from enforcement of the dispute resolution procedures contained in Article 16.
From the detailed agreement of this clause, we can see that the dispute resolution of foreign investors participating in the development of mining investment in Africa can be arranged at four levels: 1. Reconciliation (or mediation) beforehand; 2. Between equal subjects, disputes arising from the performance of the agreement Disputes are under the jurisdiction of international commercial arbitration institutions; 3. Disputes between investors and host countries are resolved by arbitration institutions with a certain nature of public international law such as ICSID;4. When international arbitration has no jurisdiction, it shall be handed over to the neutral court of a third country.
Clearly, this dispute resolution arrangement is not in favor of the host country.
In the past ten years, African sovereign countries have accelerated the legislation and amendment of natural resources development, and forced to increase the proportion of state-owned shares or local shares , strive to keep more of the profits from upstream and downstream mining development within the country. And some large state-owned African mining companies, including Gécamines, are also trying to renegotiate mining agreements and shareholder agreements with foreign investors in joint ventures. This will cause anxiety among foreign investors for some time to come, leading to an increase in the number of international arbitrations.
The exports of many African countries have so far been heavily dependent on a single mineral. For example, fossil fuels (including coal, oil and gas) account for more than 90% of export earnings in Algeria, Equatorial Guinea, Libya and Nigeria; mineral exports from Zambia, Mozambique, Namibia, Mali, Guinea, Gabon, Sudan, Sierra Leone and others to more than half of the country’s exports.
As Penda Diallo, a lecturer at the University of Exeter’s Camborne School of Mines, says in her 2020 book Guinea: Regime Stability, Social Unrest and the Bauxite Industry, mining is more than a purely economic issue in the African countries concerned; it always has political and social implications. Judging the situation and taking action based solely on economic principles or logic will often lead to delays or failures. Disregarding the influence of political factors and ignoring returns to the local society will lead to serious and unpredictable problems, such as nationalization risks, political liquidation, Local social unrest and shocks, etc.
therefore, in order to avoid protracted and costly international disputes during and after the equity acquisition, we recommend that Chinese investors join an existing mining joint venture company,and in view of the disputes that may arise when the new and old shareholders are replaced, a comprehensive consideration should be made. Before the acquisition, it is recommended to carry out detailed due diligence.
Due diligence should not only review the specific content of the original shareholders’ prior rights and obligations, the statutory and agreed procedures for equity transfer, and whether the existing dispute resolution clauses are obviously unfavorable to Chinese investment from relevant documents such as the original shareholder agreement, mining agreement, and articles of association of the joint venture company. At the same time, in addition to the documents, it is recommended to investigate the actual implementation of the original mining agreement, the relationship between the original shareholders and the host country, whether there is a risk that the mining license will soon expire and not be renewed, and whether the project has passed a legal and effective environment assess, whether there are land disputes or labor issues with the local community, and whether it can reach a consensus with the host country on supporting infrastructure construction and friendship with the local community, and ultimately achieve sustainable development of mining development and a mutually beneficial and win-win situation with the host country.