In the last few years, when public capital markets were harder to access (particularly for junior companies), it became increasingly common for us to be spending our time advising companies on possible mergers and acquisitions (M&A) targets (or “partners” for the less aggressive term). While alternatives such as royalties, streaming agreements, amalgamations, offtake agreements and private equity investments continue to exist, many mining companies are now being forced to consider M&A as a way to increase efficiencies through economies of scale and simply survive. But the road to a happy M&A marriage isn’t always a smooth one.
Putting aside the difference between business combinations in Canada and the US, the most common question is “who is acquiring who?” and dealing with the issues that go along with that. It always does matter, for a long list of reasons, including getting shareholder approval of the two (or more) entities entering in the transaction. Those shareholders may not like all of the businesses the other company is in if they diversify from what the company they are holding does. In the mining sector, this is quite common when a gold producer enters into an agreement with a gold and silver producer. Some of the gold producer shareholders may think: “hey, that’s great, my business risk will now be diversified across two precious metals,” while other shareholders will be in the “if I had wanted a position in a silver producer, I would have bought one” camp. Similarly, shareholders of a producer or producers in Australia might not like a company taking on the geopolitical risk of Africa. While the board and management of the merging companies, who have legal obligations to the company, will have a view on what the benefits or downsides of the transaction are, shareholders ultimately have to decide for themselves what is best for them based on those kinds of issues.
But what do you do if you have two neighbouring, producing companies that want to access economies of scale to create the largest gold mine in Africa, and one of the largest in the world, but don’t want to actually merge companies? The answer is to merge your neighboring properties into a shared joint venture company.
The concept of mining joint ventures is not new and the mining industry has a long history of them. Historically, joint ventures have commonly been formed been between a major company, and a much smaller property owner that does not have the horsepower to develop a project. In those situations, the original owner wants to retain some form of economic interest while at the same time having a stronger, larger partner share some of the risks, such as financial, social, environmental, political, geological and natural disaster possibilities. From the major company’s perspective, in some jurisdictions, you absolutely are required to, but often just want to, have a local partner to meet domestic content requirements and have community knowledge.
While less common, the idea of joint ventures between large companies also isn’t new. For example, Nevada Gold Mines is a joint venture between Barrick (61.5%) and Newmont (38.5%) that combined their significant assets across Nevada in 2019 to create the single largest gold-producing complex in the world.
That’s exactly what is happening here in this recently announced deal. Gold miners Gold Fields and AngloGold Ashanti have announced plans to merge their neighbouring Tarkwa and Iduapriem mines, in Ghana, under a new joint venture. Excluding the interest to be held by the government, Gold Fields will have an interest of 66.7%, or two-thirds, and AngloGold an interest of 33.3%, or one-third, in the proposed joint venture.
While the phrase “joint venture” brings to mind pictures of unicorns and rainbows, as it seems like a very simple approach to a combined business operation, such arrangements can be shockingly complex. For me personally, as an M&A lawyer, nothing strikes more fear in my heart than hearing people say “let’s keep it simple and just do this as a joint venture” as I know there will be a significant gap between expectations and reality and I will be the one having to break that news. Joint venture arrangements often address more complexities than even the most complicated merger agreement and always cover topics like:
- Disposals of project assets (do you keep everything the joint venture entity owns forever?);
- Dividend or distribution policies (do you take money out of the joint venture, and if so when?);
- Project financing (how will money flow into the joint venture to pay for the combined operations?);
- The granting of security interests over project assets (who will take security over the joint venture’s assets, and in what ratios?);
- Affiliate transactions (what is allowed between the project management company, if any, and other companies in the two partners’ groups?);
- Mine development decisions (who will make decisions about mine development?);
- When and at what price will the joint venturers be allowed to leave the joint venture or sell to the other; and
- Decisions to cease or curtail commercial production once a mine is up and running (do you keep producing flat out or do you meter production to reflect market prices?).
Developing a corporate governance structure that protects the rights of both (or multiple, if more than two) partners into the future is complicated. But as in this situation, sometimes the benefits these arrangements bring cannot be achieved by a merger agreement, which makes a joint venture approach worthwhile.