5 Methods of Doing Deals the Right Way
“Your life works to the degree you keep your agreements”
– Werner Erhard
In order to secure mining assets, the operating company can either apply for the licence itself or more often, signs an agreement with a licence holder.
Many of the valuable mining assets in Africa, Asia, Australia and the Americas are already under license to someone and they often require capital therefore there is a deal to be done.
That deal is set out in the form of an agreement that usually takes the form of 4 main types.
2 Ways Local Owners Could Leave You Needing a Lawyer
The most common way that exploration and mining companies acquire a new project is via local contacts, unless the operator applies for mineral licences directly from the issuing authority, usually the cadastre department of the Ministry of Mines. Ideally your operating company will have close relationships with stakeholders in the country in which the project is located. These stakeholders are usually local business partners, or occasionally government figures, that have mining and exploration licences issued in the names of their companies.
The best local partners are people whom you have already built trusted relationships with. That is why local knowledge is so crucial. If you sign a deal with a person who has a track record of acting with impunity and not keeping to agreements, then he/she could go and do a deal with someone else, which could land you in court. The other way that you could end up in court is if the licence was not issued to the holder through legitimate channels and if there is a dispute over ownership. So, working with trusted local partners with a good track record is essential. They won’t necessarily keep your company out of all trouble, but trusted relationships will help you avoid most ownership pitfalls.
3 Ways Option Agreements Could Help You
An Option Agreement gives you an option to Joint Venture (JV) or acquire a mineral property. Usually there is a signing fee to get an exclusive option for 6-12 months and another fee is paid at the end of the option period if you decide to execute the JV.
During the option period you can take samples and explore the property. The assay results will enable you to decide whether to proceed to exercise the option and go to JV. Option agreements are a useful way of starting things off because they give you a period of exclusivity in which you can evaluate the property. They allow you to invest a minimal amount of money in the project and walk away if the exploration results are not good. It allows the owner to have his project evaluated by spending no money or only a percentage of the costs. Another advantage for both parties is that the option agreement often sets out the terms for a JV in advance.
It is a bit like dating, you see if you like the project, you spend some money on exploring, and see how you get on with your new partner. If the relationship works out, then you could be on for engagement.
3 Ideas You Can Steal from Earn-In Agreements
An Earn-in is in place of or in addition to an option agreement. It stipulates how much must be spent on the property and in what time frame.
It allows the acquirer to earn his way from 0% ownership to the agreed percentage, usually anything from 51% to 100%.
It also allows the acquirer to de-risk his investment because he knows that after spending a certain amount of money to evaluate the property he can decide to continue or to walk away and write it off or sell the interest he has earned.
Another valuable element of an earn-in is that the owner/vendor gets work done on his property often at less or no expense to himself unless there is a clause whereby spending must be contributed by both parties.
How to Build an Empire with Joint Ventures
The JV is the key method that junior companies use to acquire properties. Let’s say that your option period has shown that the property is as good as you initially thought it was, and or your earn-in now allows you to take control of the property.
The JV agreement sets out the terms of the partnership, how much expenditure must be committed by each party and any royalties from future production. Many junior companies operate based on acquiring JV’s with promising licence holders using relatively small amounts of risk capital, and then successfully develop one or more projects through all the stages to revenue generation.
The Essential Guide to Mineral Project Ownership
Another option is to acquire a property outright. While this has the benefit of giving the owner 100% of the profits, it has the disadvantage when a foreign company is operating in certain jurisdictions that there are no local stakeholders. Local stakeholders look to protect their own interests and therefore the interests of the company. It is often advantageous to maintain at least a small but well-connected local shareholder. They will ensure that the company stays abreast of legislation and local security issues as well as provide nationals with an interest in the success of the venture. Many countries indeed stipulate that a certain percentage of a company must be locally owned.