Mitigation of current risks in mining industry through investment protection and arbitration

28 May 2024

In 2023 the global mining disputes landscape continued to grow. Underpinned by an increasing demand for critical minerals worldwide, and in an environment of heightened sovereign and regulatory risk, this year is no different. This blog post highlights two key trends that mining investors around the world are likely to experience in the second half of 2024 and beyond and how recourse to commercial or investor-State arbitration can mitigate risks.

Resource Nationalism

Sovereign risk is an ever-present challenge faced by investors in the mining – and, more broadly, resources – sector. This is likely to be exacerbated in the short term by foreseeable political headwinds. A key trend has been mineral-rich developing countries enacting measures that increase state control over resources, to the detriment of any pre-existing rights held by foreign investors – a phenomenon known as 'resource nationalism'.

Resource nationalism comes in many forms. For example, having already nationalised its lithium reserves in 2022, Mexico enacted further mining regulations in July 2023 that introduced a new tender system for concession contracts. By contrast, Chile, the second largest lithium producer in the world, introduced a regime in April 2023 whereby lithium exploration and production would be conducted by partnerships between private actors and a newly created State-owned entity, with the latter owning a majority share in the project. Panama, in November 2023, passed legislation banning the issuance of new mining concessions following public protests. Others such as Ghana and Indonesia have recently enacted measures prohibiting exporting various raw minerals.

The above are only a handful of examples of measures creating financial pressure affecting the profitability of mining projects. Given that mining companies are predominantly financed by debt, investors may be compelled to renegotiate contracts in order to fulfil their payment obligations. Further, export bans are likely to interfere with pre-existing (and often long term) offtake agreements.

Investors affected by such measures may have a range of options for dispute resolution, including rights to commence arbitration pursuant to investment treaties protecting their investments and contracts with arbitration clauses.

Mining companies have often relied on investment treaties to claim damages from States that enact measures to assume control over foreign investments without providing adequate compensation. For example, in September 2023, an arbitral tribunal constituted under the UK-Bolivia BIT awarded Glencore over USD 250 million as damages for expropriation caused by Bolivia's nationalisation of certain zinc and tin mines owned by the foreign investor. Similar investment claims currently loom over Mexico, following the State's decision to cancel several lithium mining licenses. Even in cases not involving claims of direct nationalisation, tribunals have found States liable for mining bans which were inter alia deemed contrary to the investor's legitimate expectations of a stable and predictable regulatory environment (Eco Oro v Colombia) or disproportionate to the public policy objective being pursued (Infinito Gold v Costa Rica).

Aside from treaty protections, mining companies may also mitigate political risk using the terms of their mining concessions. Long-term mining contracts often contain fiscal stabilisation clauses which protect investors from changes in the Host State's tax regime, and revenue policies that may adversely impact the project's profitability. Some contracts also contain legal stabilisation clauses which protect against regulatory changes affecting the project, such as those pertaining to labour and environmental laws. In addition, where States lack a network of investment treaties protecting foreign investment, mining companies should consider also incorporating into their contracts protections similar to those typically found in investment treaties. These could include protections against unlawful expropriation, fair and equitable treatment, full protection and security, and most-favoured nation which, when enforceable through an international arbitration clause, can protect mining projects from the increasing political risk of resource nationalism.

ESG Compliance

Within the broad umbrella of ESG, corruption risk and environmental regulation are two specific issues expected to be at the forefront of mining disputes in the years to come.

Mining projects may be fraught with corruption risks, including those associated with awarding contracts, localisation requirements (i.e., the mandatory involvement of domestic business partners), and regulatory friction when interacting with corrupt officials. These risks are exacerbated when mining juniors enter new markets assisted by local 'agents', who usually present themselves, or are seem by some as essential to business success. For example, in 2022, a US$5 billion expropriation claim by BSG Resources against Guinea over rights to the world’s largest iron ore deposit failed because the arbitral tribunal found evidence of corruption and bribery, including payment of millions of dollars to various intermediaries.

Impropriety allegations also risk escalation before domestic courts, as was the case when in November 2023 Panama's Supreme Court annulled a contract extension granted to the Canadian mining company First Quantum which came in the wake of the State banning new mining activities. Such cases typically snowball into more disputes. Since the decision of the Panama Supreme Court, First Quantum has taken steps towards an ICC claim for breach of their concession agreement, as well as an ICSID claim under the Panama-Canada Free Trade Agreement, against the State.

Equally, growing environmental regulation around mining activities means that companies must ensure continuous compliance to avoid disputes. Non-compliant investors risk States taking local regulatory action and, possibly even, the termination of mining concessions. Such cases inevitably lead to further claims, with investors arguing that their projects were in compliance with environmental law and thus claiming damages for unlawful termination of contract or their mining license/concession.

Navigating the interplay between legitimate environmental regulation and violations of investment treaty protections can be highly complex and fact sensitive. For example, in Eco Oro v Colombia, a retrospective mining ban which came into effect after the investor had acquired rights over the mining project in a sensitive wetland ecosystem, was considered not expropriatory because it fell within Colombia's police powers, i.e., their right to adopt non-discriminatory measures in pursuit of a legitimate welfare objective such as environmental protection. Nevertheless, Colombia was found to have violated the investor's legitimate expectations of a stable and predictable regulatory framework, because the State had failed to delimit which areas of the wetlands could and could not be mined despite being obliged to do so under local law, and ultimately failed to allow mining in the entire concession area without compensating for the rights held by the investor.

In light of the above examples, mining companies are strongly encouraged to retain counsel experienced in the mining sector and the specific ESG risks that emerge therein. A proactive approach to mitigating corruption risk and ensuring compliance with all laws and regulations applicable to operations (including at a local level) is highly advisable. Equally, mining companies must be aware of their rights under investment treaties especially in cases where Host States are either unable or unwilling to maintain a predictable regulatory framework to the detriment of the rights held by the investor.

Takeaways

The mining sector has always been, and remains, a dynamic global industry susceptible to a variety of risks. Navigating mining disputes requires sophisticated counsel not only with specific knowledge of the mining industry, but also expertise in cross-border dispute resolution strategies, including both contract and treaty-based arbitration. It is thus imperative for parties considering dispute resolution to engage early on counsel with relevant experience as mining disputes may take years to resolve and require a well-crafted litigation strategy.