This article is taken from GTDT Practice Guide: Mining 2022. Click here for the full guide.


‘Business as usual in Burkina Faso following coup’ was the title of the Mining Journal’s newsletter of Monday, 3 October 2022 after the coup that had occurred in Burkina Faso over the weekend – the second one in Burkina Faso in eight months and at least the fourth military coup in less than two years on the African continent with a particular focus on West Africa after Mali and the Republic of Guinea. It is therefore little surprise that geopolitics are ranked second (up four places) in EY’s ‘Top 10 business risks and opportunities for mining and metals in 2023’ released late September 2022, a leading annual review on risks in the mining sector.

According to the BBC’s calculations, coups have been occurring at an average rate of two per year on the continent between 2000 and 2019. Since 1950, over 200 attempts have been recorded by two US researchers with approximately half of them being successful.

If the number of coups d’état has decreased over the past 20 years, notably thanks to the progress of democratic processes for appointing heads of states, governments and parliaments, the new rebound of this phenomenon since 2020 raises fears of a return to the 1990s: before this month of October 2022, on 5 September 2021, Mali’s president Ibrahim Boubacar Keïta was overthrown, followed a few months later by the dismissal of the transitional government; in April 2021, the Chadian president Idriss Déby Itno, who had been in power for 30 years, died, according to official sources, as a result of injuries sustained while commanding his army in fighting against rebels in the north of the country. A military council led by one of his sons, Mahamat Idriss Déby, replaced the deceased president.

Many observers have warned of a possible domino effect in the region, in particular as the situation in Chad could have consequences for the stability of the region due to the long-time influence of the strong Chadian army on the fight against jihadism.

Other major African mining countries have encountered significant political changes, although in a less brutal manner, such as, shortly before these events, Félix Tshisekedi being elected President of the Democratic Republic of Congo (DRC) against the candidate of the presidential party of Joseph Kabila who had run the country since 2001.

This is to be added to institutional instability with frequent constitutional changes, often to allow (not always successfully) heads of states to remain in power beyond the authorised limit, something that some may consider as constitutional ‘coups’. Since 2000, over 15 African states have changed their constitutions to allow the head of the state to stay in power, including the Republic of Guinea, Comoros, Rwanda, the Republic of the Congo, Burundi, Zimbabwe, Algeria, Cameroon, Uganda, Chad, Togo, Burkina Faso, Malawi and the DRC.

Presidential elections are supposed to take place in the coming years in many countries on the continent, including in Gabon and the DRC (2023), in Algeria and Senegal (2024), in Côte d’Ivoire (2025) and in Niger, Benin and Guinea (2026). In Benin, Patrice Talon has stated that he will not run for a third term in 2026, but this is the exception rather than the rule, and a number of these elections may be considered as risks to the stability of the region.

On the flip side, there has been real improvement in (or confirmation of) political stability in other jurisdictions such as Zambia (a country very familiar with political alternances), Ghana, Mauritania, Niger, Nigeria and, to a certain extent, the DRC, with political changeovers taking place peacefully.

If the African continent remains the continent with the greatest political instability, Africa is also arguably the continent best endowed in natural resources. It holds more than 60 types of minerals and one-third of the worldwide reserves, including 78 per cent of diamonds, 61 per cent of manganese, 60 per cent of cobalt, 80 per cent of coltan, 70 per cent of tantalum and 40 per cent of iron reserves, including many of the metals required for the transition to clean energy.

The aim of this chapter is not to provide a comprehensive analysis of political instability in Africa, analyse its cause and propose what the solutions to it would be, but to share some thoughts as to its impact for existing and future mining projects, especially on the legal side, as well as an overview of the tools available to investors to protect themselves against it.

Africa, mining and political unstability

The renegotiation processes of the 2000s

In the late 2000s, the mining industry in Africa experienced a wave of renegotiation of existing mining contracts. These initiatives, often supported by international institutions such as the World Bank, consisted in the forced renegotiation by African governments of existing mining contracts (mining concession agreements, mining conventions, establishment agreements, joint-venture agreements, etc) in force between mining companies and African mining states or state-owned companies. This was said to be justified by the unbalanced terms of such contracts to the prejudice of the host states, supported by a trend of higher prices of key commodities in Africa such as copper and gold.

Whether legitimate or not, these processes were conducted in breach of most legal principles and first of all the binding force of signed contracts.

Unsurprisingly, the purpose of these renegotiations was to improve commercial terms in favour of the states and state-owned companies, whether as up-front payments (often called pas de porte in Francophone mining countries), royalties, or free-carry equity interests for the state or its state-owned companies in the holder of the mining titles, or to reduce tax and customs exemptions where contractually provided.

States sometimes used those opportunities to include some less directly commercial terms in their mining contracts, including local content obligations such as obligations to prioritise use of a local workforce or suppliers or to transform locally the ore into a refined or semi-refined product; maximum debt-to-equity ratio to avoid overleveraging projects; and maximum interest rates on shareholder loans, or increased control and taxation of direct and indirect changes of control of mining titles.

Despite the binding contracts in place, the states succeeded in their attempts in most cases, being able to leverage the favourable financial climate of the mining industry at the time which allowed mining companies to make concessions, combined with the need for mining investors to maintain good relationships with the states hosting projects in which they had sometimes invested hundreds of millions of dollars and with the support of influential stakeholders to these renegotiations from international development institutions to NGOs.

Where this was not enough, states leveraged the weaknesses of mining projects to convince investors to accept their requests; most of these initiatives started by a phase of legal audit of the mining projects to identify the state of compliance of the projects with their legal and contractual obligations. Obviously, the more serious the issues that were identified, the less favourable the position of the investors was in the negotiations.

2021–2022

Two of the countries that carried out the broadest of the renegotiation processes described above were the DRC and the Republic of Guinea. In Guinea, the process was initiated following a change of regime when Alpha Condé was elected as president in late 2010 in the aftermath of the military coup that followed the death of the long-standing president, Lansana Conté. However, the renegotiation process in the DRC was not triggered by any political change as it was initiated in 2008 and the president at the time, Joseph Kabila had been in power since 2001.

One could have expected the recent political changes in mining countries described above to trigger similar processes, especially in an environment of high, although highly fluctuating, commodity prices. Nothing has happened so far, and there is no sign that this is going to happen. On the contrary, one of the first initiatives of the new rulers of several of these countries has been to reiterate their support for the mining industry and its importance to the country and to commit to adhere to existing mining contracts. And, as far as one can see, no significant action inconsistent with such statements has been taken since then.

Since Alpha Condé’s overthrow in Guinea, the government has led extensive and tense negotiations with the parties to the giant Simandou iron ore mining project but, quite clearly, the driver of these negotiations has been to accelerate the development of this transformational mining project rather than principally to increase the take of the Guinean state in this project.

This can be easily explained by the critical place investments in the extractive industry sector occupies in a number of African countries and the returns they have the potential to generate locally: tax and customs revenues, jobs, development of small and medium-sized businesses, etc.

Furthermore, development of mining projects supports infrastructure development: electrification, improvement of roads, ports and railways. In addition to the infrastructure the financial resources generated by mining projects allow states to construct, infrastructure is sometimes built or co-built by governments with mining investors. Historically, the large state-owned mining companies of the colonial times and their successors after the independence tended to build and operate all infrastructure in the territories where they operated: from roads, airports and power plants to schools, hospitals and even housing.

The split of responsibility between private operators and governments, which should be primarily in charge of energy, transport and social infrastructure, has changed, but the lack of infrastructure often remains a key issue for the development of mining projects and, especially in countries with limited financial means and very high infrastructure needs, mining companies often still play an important co-development role, in closer cooperation with national and local governments and local communities than 50 years ago.

In the most typical example, the mining company will finance and build infrastructure, for example a railway enabling movement of the ore from the mine to a refinery or a port for exportation, and the railway will be used for the transportation of local agricultural products or the transportation of persons. This is also quite common for power or water projects in remote areas and is more and more frequently organised by mining or investment legislation, especially for transport infrastructure.

Despite the focus of new governments in recent years on pushing for accelerated development of mining assets rather than on challenging their validity or their terms, a change of regime is often an opportunity for new governments to give greater scrutiny to existing mining agreements and licences, especially upon key milestones where governmental approval is required such as during renewals of mining licences, transformation of exploration titles into exploitation licences or approvals of transfers or changes of control of licences.

If needed, the recent political instability should be a reminder to mining investors of the need to comply strictly with all legal and regulatory procedures in the development of a mining project, even in an environment that does not always encourage such strict compliance, rather than taking shortcuts and either relying on close relationships with the government in place or following the advice of an existing administration eager to move projects forward that such or such part of its own regulations can be disregarded.

It is sometimes the responsibility of the investors to make the administration comply with its own regulations. By doing so, investors minimise any leverage that would arise for a new government (or from the same government in a different mood) from small (or greater) non-compliances by investors with the applicable legal framework that could be used, with good or less good faith, to challenge the validity of existing licences or mining agreements or renegotiate their terms.

Having said that, this does not mean that these days political instability in Africa does not impact mining projects. It obviously does, in a number of different manners.

Unexpected political changes impact the share price of mining companies with a strong exposure to the countries concerned (for example, West Africa-focused gold mining companies after the coups in Mali and in Burkina Faso); they may also impact commodity prices when they occur in countries that represent a significant share of the worldwide production of a specific commodity, such as the Republic of Guinea, which hosts the world’s largest reserves of bauxite and is the second largest producer of it. However, in both cases, longer-term trends depend on the actual impact of such political changes on production.

In this respect, it is worth noting that there have been no major disruptions to mine production or bauxite exports from Guinea following the latest coup despite the short-term effects of such events, in particular logistical difficulties due to the temporary suspension of air and maritime borders.

The longer-term impact may be felt more keenly by new investments, although this is more difficult to measure: coups are followed by the establishment of transitional governments and often the suspension or dissolution of incumbent parliaments and their replacement by transitory bodies often non-elected. It takes time to establish transitional and longer-term political and administrative infrastructure and processes and this is often a cause for delays in the implementation of projects, with delays in the processing of all mining applications in particular for the delivery of licences or their renewals or for approvals now very commonly required for the transfer of mining licences and for many direct and indirect changes of control of the holders of mining licences.

In countries where mining agreements for large projects must be ratified by parliament to enter into force, it also takes time to establish new processes, for all stakeholders to get comfortable with them, and in particular for investors to become satisfied that the new processes would withstand scrutiny and challenge by successors of the new administration.

In addition to new investments and M&A transactions, political instability also impacts the financing of mining projects as international financing institutions, whether public or private, would wait for a return to stability before committing funds, even if in the recent examples this has in most cases happened quicker than one would have expected. Still, political instability impacts the risk profile of the countries concerned and does not help attract financing.

All of these factors affect the timetable of mining projects, with possible contractual consequences as mining contracts entered into between host states and mining investors set out incentives applicable to the projects but also, more and more frequently, the commitments of the investors in terms of expenditures and development timetable.

Force majeure provisions provided in such contracts or under general law here play their role as the safety net. Claiming force majeure for political reasons is, however, not the easiest way to start a relationship with a new government and mining investors are often reluctant to use that leverage.

It is interesting to compare the relatively few cases of force majeure having been declared based on political events with those declared due to the civil instability in northern Sahel due to jihadist terrorism and those based on covid-19, the latter having been quite broadly used by investors as a cause for declaring force majeure under their mining contracts or licences and some operators, especially for projects in development, having been very slow to exit from such force majeure, with a surprisingly high tolerance from the governments concerned.

Among the risks and difficulties generated by political instability, one may also mention the issues of dealing with governments or administrative authorities the legitimacy of which is questionable. This is the case, as mentioned above, when a mining convention has to be approved by the parliament, which has been dissolved and replaced by a non-elected transitory body or when key steps of the life of a mining licence have to be approved by a minister of mines put in place following a coup.

Paradoxically, there are relatively few recent examples of licences granted or agreements entered into under a transitory government or administration having been challenged by their successors, even from the opposite side, provided that reasonable due process was followed (as far as the context allowed) and that the investors did not obviously seek to take advantage of the then existing instability. The most dubious recent examples of mining licences granted or withdrawn have been by well-established governments elected in accordance with their constitutional processes.

Political instability also does not help to guarantee access to an independent judiciary in countries often already fragile, which plead as much as ever for foreign investors to make sure that they will have access (or at least will have the leverage of demonstrating that they may have access) to an independent judge, whether through international arbitration or foreign courts, to resolve any fundamental dispute between them and the host state.

How to mitigate political risks

Political instability is part of the risks and rewards landscape of working in countries blessed with natural resources like a number of African countries, and actually political instability is sometimes an unfortunate consequence for these countries of their mineral wealth which creates high expectations from the population and attracts greed from many.

This does not mean that there is no tool available to mitigate political risks and their consequences. On the contrary, investors have a number of tools at their disposal which can be exercised before making their investment, during it or when difficulties arise.

Initial legal due diligence

It is critical for investors to understand what they are acquiring or investing in. This is true in any country and any industry but particularly in high-risk countries and in a sensitive sector such as the extractive industries. It is important to understand the extent of the rights and obligations acquired but also what the background of the project acquired or invested in is: how were mining licences initially acquired? Who are the sellers, the local partners or the minority shareholders? How have legal and contractual obligations been complied with in the past years? The more compliant the project is, the less leverage there will be against the company in difficult times.

Project management

Similar concerns apply after becoming the owner of or investor in a mining project: the difficulties of operating a project in Africa increase the risk of shortcuts being taken – either express breaches of anti-bribery obligations or just small failures to comply with all applicable regulations. The purpose of this chapter is not to remind the reader of the compliance obligations applicable to companies throughout the world, including obligations to put in place due processes to make sure that what happens in a remote African subsidiary follows the rules applicable to the parent company, but to note that beyond the obvious requirement to comply with applicable laws and regulations, in the context of negotiations and renegotiations that may follow an expected change of regime, the smallest non-compliances may very significantly weaken the position of an investor.

Another key component of project management is the relationship with all the other stakeholders: the relationship with key political characters is often high on the managers’ agenda, but relationships with the local communities and lower level decision-makers at provincial or local levels do also matter, as these people can turn out to be strong allies or tough enemies in difficult times. We often see such a non-legal component of a mining project have a significant impact, positive or negative, on a project in difficult times with direct legal consequences.

Contract provisions

In Africa, more than anywhere else, it is common for the mining contract to provide for legal stabilisation of the legal and tax regimes applicable to the mining project, either for a given duration (10, 20, 25 years) or during the lifetime of the project or of the applicable mining contract. This legal stabilisation is granted to secure investors and protect them against unpredictable changes of legislation during the implementation of their projects, which may increase costs significantly or negatively affect revenues. Legal stabilisation clauses, also sometimes provided by the mining or investment legislations themselves, generally provide that the legal, tax and/or customs regime applicable to a company or a project will be the regime applicable at the date of the contract (or a specific reference date set out in the contract) and that any legislative or regulatory change that may negatively affect the rights of the investor, adopted after such reference date, will not apply to the investor or the project; stabilisation clauses may be generic (apply to any change in law) or limited to certain areas; they also often provide that investors may choose to opt for the new provisions.

It is not unusual for stabilisation provisions, particularly fiscal ones, granted to mining operators in agreements negotiated under deposed rulers to be called into question by their successors, although as mentioned above, it has not been the case in recent instances.

Stabilisation clauses are often described as an exorbitant privilege of foreign investors by their adversaries. Despite the risk of challenge in case of political changes, it remains a very valuable provision which may find its legitimacy in the high risks and very significant investments required in the extractive industries.

Dispute resolution

In a context of political risks and instability, the ability to have disputes settled by an independent judge is critical; this is particularly true for disputes with governments in countries with weak institutions.

This can be considered at several stages of a project: at the time of investment, making sure that access to an independent judge is warranted through the applicable legal framework (access to international arbitration is now quite commonly provided for in mining or investment laws); or by international arbitration clauses included in key contracts.

A very valuable source of access to such an independent judge, still sometimes insufficiently known, is bilateral investment treaties (BITs) – that is, treaties entered into between two states (here a mining country and another country) to foster and protect investments from nationals of one country into the other. BITs (and tax treaties that focus on tax matters) have been commonly used to structure investments from a tax perspective, by seeking to identify in which country intermediate holding companies should be established to minimise the tax burden of the investment, but BITs can also be valuable tools by providing access to international arbitration in case of a dispute between an investor from one state party to the BIT and the other state. BITs can be used at the time of structuring an investment to identify which BIT would offer such access to international arbitration and therefore in which country intermediate holding companies for the project should be located (this requires looking at the list of BITs entered into between the state where the mining assets are located and other countries). They can also be used in case of a material dispute between the investor and the host state if no other access to an independent judge can be warranted.

Conclusion

We have listed above some tools to protect mining investments against political risks and instability. It should be noted, however, that in many of the unexpected political changes mentioned above, a better allocation of the wealth arising out of natural resources projects is often very high in the ‘official’ list of the motivations of the new rulers. In mining contracts and mining laws, this has always been primarily translated in terms of the applicable tax regime and other key commercial and financial terms between investors and host states; it has become more and more obvious, however, that this is far from being the whole answer and a lot of work must continue to be done on ESG issues, especially everything related to local content, and how to translate these concerns and the answers brought to them in mining contracts.