Aloysius Llamzon and William Panlilo, King & Spalding
This is an extract from the first edition of GAR’s The Guide to Mining Arbitrations. The whole publication is available here.
The region’s centrality to the global mining industry
The Asia-Pacific region is home to some of the most mineral resource-rich countries in the world, including Australia, China, Indonesia, Papua New Guinea and the Philippines. In addition, many of the largest mining companies in the world reside in the region – of the top 40 mining companies by market capitalisation globally, close to half are in or closely tied to the region. Perhaps reflecting the Asia-Pacific region’s clout as both producer and consumer of mining products, some of the largest recent mining deals involve the region. With the increasing prominence of the mining industry, international legal disputes have proliferated. The mining industry has not been insulated from the changing regulatory frameworks in many countries in the region, which has made more sophisticated strategies for risk mitigation and dispute resolution necessary.
Ripe ground for mining disputes
Political risk in the Asia-Pacific
Similar to energy and infrastructure projects, mining projects are particularly vulnerable to political risk. That risk is heightened in the Asia-Pacific with countries like China and the Philippines, which belong to the 10 least attractive jurisdictions based on the Policy Perception Index (PPI), a composite index that measures overall mining policy attractiveness.
Broadly defined, political risk means the probability that political forces or events, whether occurring in a host country or resulting from changes in the international environment, will disrupt an entity’s operations. Political risk has numerous manifestations. For instance, mining companies in the region have had to contend with a recent wave of changes in environmental regulations that impact mining operations. In 2017, the Philippine Secretary of Environment and Natural Resources ordered the suspension or closure of at least 23 mining companies because of alleged environmental violations and banned open pit mining. The outright banning of open pit mining in the Philippines exemplified a broader awareness of the need to consider the environment when undertaking mining operations at all levels.
While recent governmental actions in the Philippines have not thus far led to international arbitration, measures taken by other states in the region have. In Thailand, the government suspended gold-mining operations in 2017 because of concerns over environmental pollution, giving rise to an investment treaty arbitration under the Australia–Thailand Free Trade Agreement. Similarly, when Mongolia enacted a new Nuclear Energy Law in 2009 because of environmental concerns, Canadian mining company Khan Resources commenced arbitration against Mongolia under the Energy Charter Treaty after the government cancelled its uranium licences. Khan Resources prevailed in that arbitration.
Political risks take many forms, but they are particularly acute when governments enact policies animated by resource nationalism.
The rise of resource nationalism
In almost all states in the Asia-Pacific, minerals are considered the property of the sovereign. States have always exercised ownership over their mineral resources through their regulatory powers, which swing – like a pendulum – between climates in favour of investors on some occasions, and the opposite, whenever governments decide to exert greater control over mineral resources (i.e., resource nationalism). Resource nationalism often manifests itself through regulatory uncertainty and abrupt policy changes, and therefore may pose one of the biggest risks mining companies face in their operations.
Resource nationalism is on the rise in the Asia-Pacific and across the globe generally, driven in large part by the uptick in commodity prices and a wave of populist governments ascending into power. That upward movement in prices has incentivised governments to extract a larger share of or exert greater control over mineral resources.
In the Philippines, President Rodrigo Duterte proposed the imposition of a royalty tax equivalent to 5 per cent of the market value of mineral products, in addition to an already existing moratorium on new mining projects pending revision of mining revenue sharing schemes. Exercise of greater control and extraction of more benefit from mineral resources go beyond taxation, however. In 2014, Indonesia imposed a ban on unprocessed ore exports to promote higher-value smelting domestically. That ban backfired when in 2017, the government eased the ban under certain conditions to help address a budget deficit. In the same year, however, Indonesia enacted new regulations requiring foreign mining companies to divest 51 per cent of their stake in mining projects to the local government or local companies.
Because the pendulum can swing in both directions, governments must find the proper balance between principles of state ownership and protection of investors’ rights. When that pendulum disrupts that balance or investors perceive that the balance has tipped against their favour, then disputes can arise.
For example, Indonesia has faced arbitrations as a result of government measures that have been alleged to be steeped in resource nationalism. As a result of the Indonesian ban on unprocessed ore exports, in June 2014, the Indonesian subsidiaries of the US company Newmont Mining and Japan’s Sumitomo Corporation commenced an investment treaty arbitration against Indonesia pursuant to the Indonesia–Netherlands bilateral investment treaty. Although Indonesia terminated that treaty in the same year with effect from 1 July 2015, a sunset clause in the agreement provided that its provisions would continue to remain in force until 2030.
In a filing with the World Bank’s International Center for the Settlement of Investment Disputes (ICSID), the subsidiaries alleged that the Indonesian government’s imposition of the export conditions, a new export duty, and a ban on the export of copper concentrate violated the treaty and certain contractual provisions that: (1) established all the taxes and duties required to be paid; (2) included the obligation to produce and the right to export copper concentrate; and (3) specified rights and obligations that continued to govern their operation of the copper and gold mine, notwithstanding numerous changes in Indonesian law and regulations. The claimants withdrew their ICSID claims in August 2014 after receiving commitments from the Indonesian government to negotiate a memorandum of understanding.
Similarly, in 2017, US mining company Freeport-McMoRan triggered a 120-day pre-arbitration requirement to resolve a dispute with Indonesia arising from new export regulations requiring Freeport to acquire a new licence that subjected it to additional export duties and the requirement to reduce foreign ownership to no more than 49 per cent within 10 years. Freeport alleged that the regulations breached a 30-year ‘contract of work’ pertaining to the Grasberg mine, one of the world’s largest gold and copper mines. Freeport eventually reached a deal with the Indonesian government in 2018 allowing for the issuance of a special mining permit to Freeport Indonesia until 2031, and for the government to take majority control over the Grasberg mine through state mining holding company PT Indonesia Asahan Aluminium.
Resource nationalism, and the expropriatory measures that often manifest it, can also take more overt forms. In 2013, Papua New Guinea enacted a law that purported to cancel the shares held by PNG Sustainable Development Program Ltd in Ok Tedi Mining Limited, which had a Special Mining Lease over the Ok Tedi mine, an open pit copper and gold mine in the Star Mountains of Papua New Guinea. The company commenced arbitration, where the tribunal held that it did not have jurisdiction because there was no ‘consent in writing’ to arbitration from Papua New Guinea.
Multiple stakeholders, multiple potential disputes
Despite the significant developmental impact mining plays, particularly in (but not limited to) the states of the Asia-Pacific region that are least developed, disputes have arisen on numerous occasions, often prompted by forces operating outside governmental auspices. It is thus difficult to predict how and when issues arise – and disputes have indeed occurred at every stage of a mining project, from the exploration phase, to commercial operations, to winding-down, to remediation.
Mining companies must be prepared to balance what can often be conflicting interests from a multitude of stakeholders, each of which can be governed by different laws, regulations and contracts, as well as international law. Outlined below are typical disputes that mining companies have faced in the Asia-Pacific region based on the stakeholders involved.
States and state entities
First consideration must, of course, be given to states and state entities themselves. Coincident with the principle of ‘permanent sovereignty’ over natural resources in international law, many states will have some version of the ‘Regalian Doctrine’, wherein states retain ownership over mineral resources. The Asia-Pacific region is no different, and mining companies operating there will need to deal with numerous incarnations of the state, which can include national and local governments, as well as Byzantine networks of ministries, and state-owned or affiliated entities.
In 2017, for example, the Ras al-Khaimah Investment Authority, an investment authority from the United Arab Emirates, commenced a nearly US$50 million investment treaty arbitration against India. The dispute pertained to a contract for the construction and operation of an alumina and aluminium refining plant, which was signed not with the Indian government, but with a company controlled by the provincial government of Andhra Pradesh. The provincial government had ordered the cancellation of the contract because of purported ‘public agitation’ over bauxite mining. The potentially overlapping jurisdictions of the national government, the provincial government, and the state-owned company, together with the non-governmental ‘agitation’, all contributed to the complexity of interests involved in that dispute.
Issues can arise as early as the permitting stage. This was the case when the Indian metal producer Indian Metals & Ferro Alloys Ltd confronted a mix of Indonesian governmental instrumentalities, all of which were involved in the issuance of mining maps and mining concessions. Indian Metals filed a treaty claim against Indonesia in 2016 under the India–Indonesia bilateral investment treaty, alleging that its subsidiary was unable to extract coal because its concession area overlapped with mining concessions granted to third parties, and the area fell within boundaries disputed by other Indonesian provinces.
Joint venture partners
Foreign ownership limitations often necessitate the formation of joint ventures between international mining companies and prominent local companies or businesspersons who may or may not possess a background in the mining industry.
As much as disputes can arise at any point in a mining project, joint venture disputes can also occur at any stage of the parties’ partnership. These disputes can be triggered by a project’s commercial failure or success, or even just concerns about the viability of a mine. Similar concerns, for example, animated an arbitration by a subsidiary of Australian miner Berkeley Resources against Enusa Industria Avanzadas SA, a Spanish state-owned uranium producer. Berkeley alleged that Enusa did not honour its obligation to form a joint venture for uranium mining because of its doubts over a feasibility study completed for the mining project. The parties settled the dispute, however.
An important but often underestimated risk in joint venture partnerships is the mutual responsibility each partner has for the acts of the other, including acts that they did not know but could have known, had they conducted due diligence. In Churchill Mining and Planet Mining v. Indonesia, UK and Australian mining companies partnered with a group of seven Indonesian companies over the East Kutai coal project in Indonesia. After the foreign companies made their investment, the local partner obtained mining licences, part of which was later shown to overlap with other mining concessions issued. The local government revoked all the licences granted to the local partner, which prompted an investment treaty arbitration claiming expropriation. Indonesia defended itself by showing that the licences were forgeries and won, with the tribunal holding the foreign investors accountable for having failed to exercise due diligence in discovering the forgery, even if the investors had not participated in nor had knowledge of their local partner’s illegality.
Local and indigenous communities
While mining projects can make significant contributions to local communities, those relationships can also turn sour and undermine the viability of a mine. A prominent example is the Panguna mine in Papua New Guinea’s autonomous island of Bougainville, where violent protests from local communities precipitated the shutdown of the mine in 1989. A peace agreement reached in 2001 established autonomy for Bougainville and provided for an independence vote. More recently, in Thailand, concerns about suspected levels of manganese and arsenic in villagers living in the vicinity of the Chatree Gold Mine, as well as concerns regarding environmental pollution, were used as justification by the government to close the mine. That dispute led Kingsgate Consolidated Ltd, Chatree’s Australian operator, to commence an investor–state arbitration against Thailand in 2017 in which Kingsgate claimed that the government had expropriated its investment and violated its right to fair and equitable treatment under the Australia–Thailand Free Trade Agreement.
Contractors and subcontractors
Mining projects typically require mammoth infrastructure projects with not just one, but several contractors and subcontractors. Mining projects can therefore result in a web of EPC and other affiliated contracts, each of which could have different counterparties. Because of the interconnected nature of these construction agreements, a default in one can potentially trigger breaches in downstream or upstream agreements.
Since mineral resources are ultimately destined for offtakers, they too, are crucial stakeholders, and disputes with them can cripple a mining project. These supply disputes typically arise when price fluctuations in the commodities market occur.
When iron ore suddenly became cheaper in the spot market at the height of the financial crisis in the late 2000s, offtakers sought to default on year-long supply contracts. The plummeting of iron ore prices resulted in disputes and subsequent legal proceedings, such as the arbitration between Australia’s Mount Gibson Iron Ltd and Rizhao Steel, a Chinese steel mill owner. Both parties had signed a supply contract under which Rizhao agreed to purchase up to 1.5 million tons of iron ore annually. Mount Gibson settled that dispute, together with two similar disputes with other customers from Hong Kong and China.
Conversely, mining companies as suppliers can seek to take advantage of upward fluctuations in commodity prices. In March 2011, a sole arbitrator found in favour of the Steel Authority of India Ltd (SAIL) against Vale Australia Pty Ltd and AMCI Pty Ltd, two Australian mining companies that entered into a long-term coal supply agreement with SAIL. SAIL argued in the arbitration that Vale and AMCI had deliberately breached the supply agreement because of ‘a manifold rise in the price of coal’ in the late 2000s, which resulted in SAIL having to procure the shortfall from other sources at much higher prices.
Although already a major producer, as well as the pre-eminent market for minerals, immense mining potential remains in the Asia-Pacific region. The mining industry has attracted billions of dollars in investment, and yet the region still possesses vast amounts of untapped mineral resources. Governments in the region play a crucial role in balancing policies to attract and protect mining company investments, with generally accepted principles of state sovereignty over mineral resources, as well as concerns over the damage that mining inflicts on the environment and to local and indigenous communities. Mining companies, for their part, must also balance commercial interests, the concerns of numerous local, national and international stakeholders, and political risk, which rising sentiments of resource nationalism can amplify. When governments and mining companies fail to find that balance, disputes arise. The region will likely continue to see an uptick in mining-related disputes handled in international fora, as established international conglomerates and junior miners alike step up to meet ever-increasing demand from an Asia-Pacific region that continues to pose political and environmental challenges.
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