When scaling back mining operations, a number of contractual and legal rights and obligations may be affected.

In tough or uncertain economic times it is only natural for miners to consider scaling back their operations. Doing so requires careful planning on many fronts.

In part 1 of this article, we looked at how legislative instruments, rights and obligations, such as development plans, plans of operations and safety arrangements, may be affected by scaling back mining operations as well as the need to ensure compliance with approval conditions.

In this second part, we'll discuss how compensation arrangements and contractual arrangements may also be affected by any scaling back.

Compensation issues

Where mining operations (including exploration activities) are being scaled back, the miner may end up having substantially less impact on the land than if the mining activity had proceeded as originally planned.

Compensation, which must be resolved prior to the grant of a mining lease either by agreement or by a determination of the Land Court, may be reviewed under the Mineral Resources Act (1989) (MRA) where there is a material change in circumstance. Any review of compensation can be done either by agreement or by a determination of the Land Court.

The MRA gives an example of a material change of circumstance as being a change from underground mining to open cut mining, the latter of which would clearly have a greater impact on the land.

The MRA would equally apply to a material change of circumstance that has a lesser impact on the land, for example if there is a change from open cut to underground operations. A cessation or scaling back of mining operations could potentially amount to a material change of circumstance.

For a mining company (and indeed for an exploration company or a petroleum company as similar provisions apply), where a cessation in operations or a scaling back of operations can be said to amount to a material change of circumstance, compensation can be reviewed. This could lead to a recovery of amounts previously paid by way of compensation to a landowner.

Recovery of previously paid compensation from a landowner is a possibility that may not have been seriously contemplated by either mining companies or landowners to date. However, if existing mining plans are scaled back significantly, then that could constitute a material change of circumstance which would trigger a review of compensation. Where a substantial amount has been paid in compensation in such circumstances, there is an argument that a court could find that a landowner is not entitled to retain all previously paid compensation when the impact on the land will be materially reduced or will not occur at all.

In addition to recovering amounts under the review provisions of the MRA, compensation agreements may provide for payment of compensation on particular triggers or events, for example upon commencement of mining in a particular area. Where agreements contain such clauses and there is a scaling back of activities, those triggers, and the obligations to pay compensation, may not arise.

Issues for overlapping tenure agreements

Agreements relating to overlapping tenures are regularly based on an agreed technical and operational plan of activities to be carried out by the holders of the overlapping tenures. Each party is generally obliged to carry out the activities proposed in the plan.

If one party were to scale back their operations, the agreed plan may need to be reviewed and changed. This may trigger other rights and obligations under such agreements. For example, rights to compensation may arise and obligations to attempt to agree a new plan may also arise (which, in the absence of agreement, may mean that the dispute resolution processes under the agreement need to be used). In the case of a co-ordination arrangement, it may also be necessary to obtain Ministerial approval to the changes.

Changes to the agreed plan may have a cascading series of effects on each of the projects. For example, scaling back mining operations after various petroleum wells have been plugged in anticipation of future mining, may mean that a petroleum producer could re-establish wells in the area (at additional cost which may be recoverable from the miner), may need to secure additional pipeline capacity for that unexpected gas (potentially at higher rates than might have previously been available) and may need to find buyers for that gas.

The exact impacts of a scaling back of activities will depend significantly on the terms of the agreement agreed by the parties, for example, there may be specific provisions relating to the payment of compensation for changes to an agreed plan of activities and there may be specific processes that need to be followed to change an agreed plan of activities. Each contract will need to be considered in detail in order to determine the impacts of proposing a scaling back of mining activities.

Service and supply contracts

Each mining project will have a number of contracts relating to services and supply for that project. Each of these may also be affected by a scaling back of mining activities. Key issues for such contracts include whether force majeure clauses can be relied upon and whether take or pay obligations will continue notwithstanding any scaling back.

Some contracts may contain force majeure or other clauses that excuse performance of obligations in certain circumstances, for example, a sales contract may permit a reduction in supply of product. Whether or not such clauses in a contract would excuse performance in the event of a scaling back of operations will depend on the particular wording of the clause as such rights are wholly contractual in nature.

Many force majeure clauses excuse performance due to circumstances that are beyond the reasonable control of a party. Where there is a voluntary decision of a miner to scale back their operations, the question must be asked whether this is beyond the reasonable control of a party and therefore amounts to an event of force majeure as it is a conscious decision to avoid unnecessary costs. In the absence of a contractual right that excuses performance, the miner may potentially be in breach of contractual obligations under these contracts.

Scaling back of mining operations may also not excuse producers from take or pay obligations under haulage or port contracts. Generally such clauses require minimum amounts to be paid whether or not allocated capacity is used in full or to a minimum standard. If a scaling back of operations means that there is a reduction in production, a miner may still be liable to make payments under take or pay clauses.

A miner will need to carefully consider its contractual obligations when it is considering scaling back its operations as rights and obligations will vary depending on the particular wording of the contracts.

Conclusion

Scaling back a mining operation will have more implications than simply scaling back operational activities in response to market forces. Statutory obligations may arise, approvals and regulatory documents may need to be amended, compensation may need to be reviewed and contractual obligations will need to be considered.

A detailed review of the legal implications may be one facet of many that needs to be undertaken when scaling back a mining operation to ensure that the changes to the activities can be done in compliance with the relevant legislation and with the minimum of legal risk and exposure to claims from third parties who may be adversely affected by the scaling back.