Canadian miners face multifaceted and often complex challenges when investing abroad. Investment structuring, so miners can obtain the benefits of international investment treaties, may help protect against political, social, and environmental risk when doing business internationally in a way that contractual assurances, political risk insurance, and other mechanisms, cannot.
Sources of Risk
New and rare earth metals are seeing an exponential increase in demand. Like any mining operation, the exploration and development of rare earths is a capital-intensive endeavour, requiring substantial investment at the outset and usually over a long term. These exploration and development efforts are themselves at the intersection of many competing political and regulatory issues, including land use, regulatory permitting, government interests in strategic or critical domestic supply, environmental regulation, taxation and government royalty policy, and emissions targets. The risk as a result of these and other issues is quite often compounded for Canadian miners who are working internationally.
When required to make investment decisions in the near term, with a view to predicting where that investment alongside political, social, and environmental risk might be in the future, investment structuring is uniquely positioned to help miners expand their options in the event of political or regulatory change that erodes or negatively impacts an investment.
What is investment structuring?
Investment structuring is an examination of a miner, its investment, and what protections are available under international investment agreements – treaties between countries – to see whether the investment or miner is covered by the protections afforded by a particular agreement, or if a change in structure (for example, making the investment via a subsidiary domiciled in another country) might be required or more beneficial. International investment agreements are sometimes dedicated to matters of investment, these are called Foreign Investment Protection and Promotion Agreements in Canada, or free trade agreements with investment protections, such as the former North American Free Trade Agreement (NAFTA).
What protections does investment structuring offer?
International investment agreements typically include protections for, amongst other things, rights to freely transfer funds related to the investment in and out of the jurisdiction, rights to be treated the same or no less favourably than nationals of that country or of any other country (protections against discrimination), a right to full protection and security, a right to not have the investment expropriated in whole or in part without compensation, and a right to a minimum standard of treatment. Taken together or individually, these can guard against a number of situations that may arise and have a negative impact on the value of a miner’s investment.
If one of these substantive protections is breached, then international investment agreements also include a procedural mechanism for international arbitration. For covered investments, this allows a miner to bring a claim directly against the foreign country in international arbitration. This option, alongside contractual, insurance and other choices that may be available to a company, provides an important lever to mitigate risk. The threat of a dispute under an international investment agreement might be sufficient to bring the parties into discussions to negotiate a solution. Where available, the protections and process of an arbitration against the country can be examined alongside other options. For example, the manner in which the loss for a breach of an international investment agreement is valued might be different from how such is valued under an insurance policy, which depending upon the nature of the investment and issues provides a choice to a miner in how to proceed. Without the protections of an international investment agreement in the event of, for example, an expropriation of a mine or interest by a government without compensation, the company would be forced to only rely on the contractual or other agreements it entered into, which might not be with the government, or proceeding in local courts, which may not be independent.
The political, social, and environmental risks faced by miners are quickly evolving. The economic future for rare earths is also one that attracts local political and social attention. A change in a government, after an election or otherwise, could result in a dramatic impact for a miner. It may not be possible to predict what those impacts will be, but it is possible for miners operating internationally to arm themselves with options to address potentially negative impacts. Investment structuring, at the outset of an international investment and alongside any corporate reorganizations, takeovers, or other changes, should be a part of every international miner’s due diligence.
This article was first published by Canadian Mining Magazine on September 15, 2022.