John Naughton and Cameron Roper recently acted for FCF Minerals Corporation (FCF) in relation to the project financing of its Runruno gold-molybdenum project in the Philippines. This transaction represents the first true project financing of a project being developed in the Philippines using an FTAA. In this article, our Project Finance experts share their knowledge and insights on using an FTAA as the basis for tenure.
The Runruno project is located in Nueva Vizcaya (around 320km from Manila) with a defined reserve of 1.42 million ounces of gold and 25.6 million pounds of molybdenum. Project completion is expected to occur in 2015.
The financiers, HSBC and BNP Paribas, provided funding by way of a US$75 million term facility and a US$8 million cost overrun facility. The financing is secured by a comprehensive security package involving security over FCF’s Philippines assets, as well as offshore share security. Until completion, the financing is also supported by a guarantee from FCF’s parent company, AIM-listed Metals Exploration plc.
The King & Wood Mallesons team acted as lead counsel and, working closely with local counsel (including Roderick RC Salazar III of Fortun Narvasa & Salazar in the Philippines), advised FCF in relation to all aspects of the financing transaction.
Why was this transaction significant?
This transaction represents the first true project financing of a project being developed in the Philippines using an FTAA as the basis for tenure. An FTAA, or Financial and Technical Assistance Agreement, is one of the two key forms of tenure for mining projects in the Philippines. They are a form of state agreement (entered into by the President of the Philippines on behalf of the Philippines government) for the large-scale exploration and development of gold and other metals and minerals. In practice, the decision of the President is based on recommendations by the Department of Environmental and Natural Resources and the Mines and Geosciences Bureau. To date, only six FTAAs are recorded as having been entered into between the government and mining companies (the tenure for the majority of projects in the Philippines is provided for under Mining Agreements such Mineral Production Sharing Agreement).
FTAAs are granted for a period of 25 years and require a capital investment of at least US$50 million. Unlike other forms of tenure which may only be held by Philippine nationals (which, in the case of corporations, requires a minimum shareholding of 60% by Philippine citizens), an FTAA may be granted to a wholly foreign-owned company.
FTAA financing considerations
Nature of project tenure
One of the key difficulties in successfully financing an FTAA-based project lies in understanding the complicated Philippines land title systems which apply to the project area. The FTAA itself does not confer title to the project area. Instead, it operates as a sort of overarching approval which allows the mining company to access and use government land and private land required for the project (subject to the payment of compensation to private landowners).
The mining company may find it beneficial to purchase private land outright from landowners (rather than enter into compensation arrangements for access to the land). However, this may be a protracted process due to the complicated land tenure issues in the Philippines and the difficulty in establishing the title of landowner sellers. Further, in light of the restrictions on land ownership by foreign corporations, the acquisition of land holdings required for project purposes from private landowners will generally require a foreign mining company to:
- procure an entity (in which it may hold no more than a 40% interest) to hold title to the land; and
- enter into access and use arrangements with that entity in relation to the land.
Given the issues presented by tenure from a security perspective, financiers will need to ensure that they have a sophisticated understanding of the FTAA and its interrelationship with Philippines land title and security laws.
Restrictions on FTAA security and assignment
Another key consideration for financiers to FTAA-based projects relates to the restrictions on security and assignment contained in the government approved form of FTAA (and related regulations). As part of the initial structuring of the transaction, it is important to keep in mind that the approval of the President is required for a financier to take security over a mining company’s rights under an FTAA. The FTAA does not provide for a regime in relation to the seeking of consent and our experience suggests that such a process would take a considerable amount of time.
Even if consent to security is obtained, financiers need to understand that in an enforcement scenario they will not simply be able to transfer the FTAA to a buyer of the project unless the consent of the government is obtained. Any potential purchaser of the project would need to meet the qualification requirements imposed by the government. Further, the FTAA’s change of control provisions mean that a transfer at the shareholding level will be similarly restricted (although a financier is still likely to find enforcement at the shareholder level far simpler than at the Philippine asset level). The FTAA does not include a right for a financier to seek a direct deed with the government and, in our experience, there is no precedent for such an arrangement.
Financiers need to ensure that these issues are considered in detail as part of their due diligence and, if government consent is a requirement, factor in the consequences for timing which are likely to arise as a result.