Finding finance in the mining and metals sector

A guide for mine developers



An in-depth reference guide looking at possible solutions to successfully securing finance for mining activities. First published in June, 2013.


In today’s economic climate, the traditional project finance model based on high, stable commodity prices and the availability of debt is just not working. There is reluctance for commercial banks to lend as they continue to consolidate and retain high levels of capital in order to weather any unforeseen circumstances and possible losses.

For companies, the state of the world’s financial markets can be troubling. Debt is often essential to complete the mine and with the lack of liquidity, there seems like no other option but to mothball the project.

However, there are still options available for companies to raise finance, but to do so requires innovation and a combination of tried and tested solutions. The key is to understand the rules of engagement.

The rules of engagement

Draw a timetable and stick to it!

Work backwards from when debt needs to be injected into the mine (the Project) and draw a detailed closing timetable. 

Remember that several sources of financing may need to be drawn on, so determine whether the debt can be obtained in stages and how much is required for each stage.

When drawing up the timetable, bear in mind that financiers will not lend without a technical report. Factor in time to appoint an independent engineer and do not underestimate the time it will take financiers to become comfortable with the content of the technical report.

Your timetable will include time for negotiating and finalising finance documentation (approximately eight to ten weeks). Draw up a separate timetable for each source of financing and each stage. Remember that in today’s market, financiers will take longer than usual to obtain credit committee approvals.

Note: In our experience, time allocated for satisfying CPs1 is usually underestimated by borrowers – in particular, the time it would take them to obtain governmental consents.

Consider alternative funding sources to project finance

The key to drawing down in accordance with your timetable is keeping your options open. Always retain the right to run alternative financing solutions should one finance route not reach close or be delayed.

Banks will insist that a certain level of equity is injected into the Project prior to lending. How much equity can you afford to inject into the Project to satisfy a bankable debt to equity ratio?

Assess whether you need cost overrun funding: this will be a function of whether you have an EPC or EPCM type structure and the terms of the EPC contract/covenant strength of the EPC contractor. If cost overrun funding is needed, who can provide you with this at an optimum price?

Example: We have seen this provided by way of mezzanine debt/letters of credit (banks/rated institutions); maintenance of a cost overrun reserve account (consider when this will be released); or advance purchase from the off-taker (consider the impact upon the terms of the off-take).

Bridge financing

In a market where there is a lack of long term debt, consider using bridge financing for the preliminary stages of the Project. Commercial banks are more likely to lend on a short term basis which they can stomach taking and holding with limited or no syndication.

Bridges are traditionally short term loans (up to three years) repaid in a lump sum at the end of the term (a bullet repayment). Bridges are designed to be refinanced and banks may insist on using a range of techniques (such as margin ratchets) to encourage borrowers to refinance the bridge as quickly as possible. Bridges can be very useful to fund the initial stages of a project which are considered to be more risky. It also provides an option for borrowers who wish to ‘ride out the storm’ rather than be locked into long term debt that might be significantly cheaper in four to five months.

The question to consider is what can be done if refinancing is not possible? Are there options available other than default? You should also consider what level of security can be offered to the bridge lenders. It may be that the bridge lenders will seek to take the same level of security as the project lenders. Will this be possible to arrange quickly? Will the bridge lenders be eventually taken out by the project lenders? Are there inter-creditor issues to consider?

Equipment financing

Are there assets in the project which can be used to raise finance? It may be that financing could be raised off the back of existing equipment or carved out of the assets secured by project finance banks to raise additional financing. Equipment suppliers may be willing to enter into buy back arrangements whereby they agree to repurchase the equipment at the end of the Project thus providing additional comfort to equipment financiers.

Alternatively, the supplier of equipment may be willing to provide the equipment on a lease-buy arrangement whereby the supplier leases the equipment to the Project (taking security over the equipment) and at the end of the Project the equipment is purchased by the Project for a price discounted by a percentage of the lease payments. There may be certain tax advantages to this arrangement if a tax lease structure can be achieved. Borrowers should consider their obligations for maintenance, insurance and repair of the equipment during the Project.

Export Credit Agencies (ECAs)

Another important source of finance and credit support to consider are ECAs. While ECAs have been active in mining projects for many years, given the current lack of commercial liquidity, consideration should be given to whether the Project can be structured to increase the country content to involve one or more ECA.

Typically, ECA support in this regard has been linked to the financing of specific equipment supply contracts. In these arrangements, ECA involvement in the funding structure requires the project company to source its equipment/assets from a particular jurisdiction. The ECA of that jurisdiction will then provide support to the project company (either directly, or indirectly via the equipment lenders or the equipment suppliers) in relation to the relevant equipment supply contract. It should be noted that it is possible to obtain support from multiple ECAs if multiple imports from various exporters in different jurisdictions are preferred by the project company. Indeed, we have seen a rise in the number of deals involving multiple ECAs. In such circumstances, typically each ECA would enter into an individual facility agreement with the project company, which is linked to a common terms agreement. As an alternative, it may be possible to obtain one-stop co-financing from ECAs, where one ECA – the lead ECA – will provide the principal cover, and effectively sub-participate various portions of the cover to the other relevant ECAs. This can often be a more efficient documentation process as there is then only one ECA facility with the borrower.

Whilst this form of support continues to exist, however, ECAs are also able to support projects on a more generic basis if there is a direct link to the host country, which will inevitably promote export of goods/equipment and labour/services from the ECA’s home jurisdiction.

Some of the advantages of ECA involvement in a project financing are set out below:

  • ECAs can provide political risk insurance that is either unobtainable or prohibitively expensive in the commercial market place, which can in many instances (and particularly in emerging market economies) often be the key to whether a particular project goes ahead at all. Indeed, commercial lead arrangers of project loans may often stipulate that a fixed ratio of covered to uncovered loans must be maintained throughout the life of the facility.
  • ECAs offer repayment periods for projects in emerging market economies of up to 12 years (with a two year grace period for construction). The repayment period is typically limited to 10 years in developed/OECD countries. Particularly in the current market, ECAs may therefore offer a longer repayment period than those that are available in the commercial bank market.
  • ECA financing increases the debt capacity of a project (and can thereby increase shareholder returns) – commercial banks are much more willing to lend if their funding is guaranteed by ECA cover (both in terms of risk mitigation and the fact that ECA covered loans may be zero weighted for capital adequacy purposes). Further if an ECA lends direct into a project this reduces the reliance on commercial bank debt (and therefore reduces the syndication risk) and can encourage commercial banks to make up the residual funding requirement since there is clearly some form of government support for the project. It can also enable borrowers to preserve credit lines with banks since ECA covered debt may not count towards the lines available – this final point is less relevant to project finance borrowers and more applicable to corporate lending.
  • ECA support can assist a project’s interest rate hedging programme by providing interest rate equalisation support, to enable borrowers to benefit from long term loans at fixed rates. Further, this can be done without swap costs or credit lines.
  • Where an ECA provides both political and commercial risk cover, banks can book the loans covered as a credit risk on the government of the relevant country of the ECA and not a credit risk on the actual borrower or its country. This not only assists in obtaining internal credit approvals, but is also beneficial from a capital adequacy and bank regulatory standpoint.
  • ECAs’ pricing is significantly lower than that offered by commercial banks. Although we have seen pricing on ECA deals (ie, the margins required by commercial banks) increase dramatically in recent months, the premium that the ECAs themselves charge for their support has remained at roughly the same level as before the credit crisis, thus making ECA financing significantly cheaper than other forms of financing in the current market. In particular, agency risk premia do not fluctuate in line with private market pricing, being instead primarily determined by tenor profile, loan size, country risk and availability period. ECAs are influenced by borrower credit risk and current market conditions, but their corporate spend curve is not as steep as the private market’s.
  • ECAs are typically exempt from withholding tax. This is a unique and very attractive feature of ECA financings, and can be a critical factor to ensure the commercial viability of a project in countries which have prohibitive withholding tax measures. Further, there is no incidence of withholding tax on commercial bank loans with ECA cover if the funding is by a bank having a tax status in the country of the ECA.
  • ECAs have significant lending capacity and, subject to the restrictions on the percentage of funding set out below, can support large projects for up to several billion dollars.
  • ECAs can fund/cover up to 85 per cent of the export contract value in relation to a project, plus the amount of agency risk premia, interest during construction and 30 per cent of ‘local costs’. This can produce a much higher loan to value/debt:equity ratio than could be obtained in the commercial bank market, particularly in emerging market economies.
  • ECAs are funded by governments, and are therefore not impacted as much by market liquidity issues. This is particularly relevant in the current illiquid climate.
  • For non-investment grade borrowers, ECA involvement can transform the credit risk profile of project debt to investment grade, thereby making it a significantly more attractive investment proposal for other funders.
  • ECA funding is generally available in any convertible currency in which the company earns revenues. This can assist local currency funding and reduce the company’s exposure to exchange rate risk.
  • Some ECAs allow ‘Reach Back’ which refers to the ability of ECAs to finance capital expenditures already paid. For example, SACE allows for reach back of about one year, and Hermes allows reach back until the date when the exporter has filed the Hermes application for exporter coverage.

Development Finance Institutions (DFIs)

Traditionally, the mandate of DFIs has been to support commercial lending into strategically important Projects in developing countries. DFIs have sought to complement commercial lending rather than replace it and have traditionally only underwritten around 30 per cent of the overall debt. However, with little to no commercial liquidity available, a lot of attention has been given to DFIs and borrowers have been looking to DFIs to fill the gap left by commercial lenders. 

Consideration should be given as to whether the Project is sufficiently strategic or important to the continued development of the region so as to entice DFIs to become involved. Consider making an application to the DFIs interested in the region where the Project is located. Often DFIs will be focused on different aspects of the Project compared to commercial lenders and any environmental, social or development incentives in the Project should be highlighted (such as the development of local infrastructure).

Example: we have seen an encouraging response from DFIs which are stepping up to provide, in some cases, up to 100 per cent cover. An example is the US$2.3 billion raised for the expansion of the Panama canal where the entire US$2.3 billion was provided by five DFIs (Japan Bank for International Cooperation, EIB, Inter-American Development Bank, Andean Development Bank and IFC).

Off-taker financing

Another source of financing could be the end-buyer of the commodity to be produced by the Project (the Off-taker). Many international traders have accumulated large sums of available cash during the recent commodities boom and may be willing to finance the Project, either off its own balance sheet or through its relationship bank that may be prepared to take some of the production and country risk.

The financing could be structured either as a straight loan or as a pre-payment for the eventual delivery of commodities produced by the Project. In the latter example, the loan and interest is repaid through the delivery of goods from the Project. 

Negotiate detailed terms of the mandate letter and term sheet

Consider presenting the prospective financiers with a draft Mandate Letter and Term Sheet setting out the financing package you are seeking and on which they can comment – if possible, do not leave it to the prospective financiers to issue the first draft of the Mandate Letter and Term Sheet. Consider that you may need to have more than one Term Sheet and more than one Mandate Letter for each source of funding being sought. Ensure that these do not conflict or prevent you from running concurrent enquiries for different sources of financing. 

Consider presenting prospective financiers with a first draft of all key finance documentation which could serve as a basis on which they would deliver their commitments.

Consider inserting the "snooze-you-lose" concept in the Mandate Letter – a drop-dead date by which banks have to deliver credit approved commitments and sign finance documentation, failing which their appointment falls away (this will maintain the competitive tension). Consider other events upon which you would wish to terminate their appointment – for instance, where the banks alter the financing terms set out in the Term Sheet.

In the present economic turmoil cost of funds has become a major issue for borrowers and lenders. We have recently agreed revised provisions for costs of funds and are actively involved in developing new provisions as the market evolves. One important matter to address and be alive to is possible mismatches between cost of funds under loan documents and under hedging documents.

Agree a detailed term sheet even if the terms therein are only indicative, in particular negotiate the inclusion of the following borrower-friendly caveats:

  • Set out the extent of representations, undertakings and events of default: if group entities other than the borrower are signing the finance documentation, consider whether these entities should give a restricted set of representations and undertakings.
  • Address materiality and reasonableness thresholds, as well as cure periods: ‘cure periods’ allow you time to remedy any events before they become an event of default; qualify representations and undertakings you give with ‘materiality’ such that only breach of those which are material can trigger an event of default; banks should act ‘reasonably’ in circumstances where their opinion is required.
  • Include a definition of ‘Material Adverse Effect’ (MAE): banks usually require any event with an MAE to trigger default under the finance documentation thus allowing them the necessary flexibility to pull the plug at any time. As you will appreciate, what constitutes an MAE is subject to heated negotiations and we would advise you to pre-empt this discussion and agree its definition at the term sheet stage, a time where you have more leverage as banks are usually keen to sign the Mandate Letter and Term Sheet asap. 

Obtain preliminary sign-off from the Independent Engineer prior to execution of the Mandate Letter/Term Sheet.

Appoint the advisers at an early stage

Arrange for an independent engineer, with sufficient experience vis-à-vis the mining methods to be utilised, to be appointed in conjunction with the prospective banks during the Mandate Letter and Term Sheet negotiations (the Independent Engineer). 

Depending on your team’s expertise, consider appointing a financial adviser to run the funding competition, review/agree the banks’ financial model on the Project’s sensitivities, assess your hedging and PRI2 needs and, in collaboration with your appointed legal counsel, identify key bankability issues.

Appoint a tax adviser at an early stage (ie, before the banks’ appointment) so that the most tax efficient corporate structure is utilised and presented to the prospective banks at the time of the funding competition – so as to manage expectations. 

Example: For instance, the way you approach project documents can impact on tax efficiencies of the deal.

Assist in the choice of the lenders’ legal counsel as this has a bearing on swift closing and ultimately you will be paying for all transaction expenses! The banks need to be advised by a pragmatic legal team familiar with working in developing countries.

Conduct preliminary due diligence

Conduct preliminary due diligence (ie, whilst you are running the funding competition) to identify fundamental/‘unbankable’ flaws which might impact your closing timetable.

See checklist in Schedule 1 for guidance as to the types of questions raised by banks, to which you will have to provide a satisfactory response. The preliminary due diligence exercise will also help you refine the financing package - in particular, the security you can offer to prospective banks - and allow you time to mitigate residual issues. 

Example: There is currently a governmental review of the mining concessions taking place in the Democratic Republic of Congo (DRC) which certainly makes project financing difficult.

Example: On a previous deal, we identified that the project company’s mining title would expire prior to the final maturity of the project finance facility. The preliminary due diligence exercise allowed the project company to initiate the renewal process, thus limiting any impact on the project finance timetable.

Can you offer the banks onshore security over the mining permit, buildings, plant and installations, mining products, shares of the borrower and onshore accounts? This will be dependent upon the mine location and specifics in-country. 

Are there any rules in place in respect of repatriation of offtake proceeds? If so, does the amount repatriated have to stay onshore for a specific time period? To the extent that it does, there may be issues concerning the cash waterfall. Once repatriated, do the proceeds have to be converted in local currency? We have encountered these issues previously in Turkey and the DRC for instance. Our advice would be to alert the banks’ counsel of these issues – which in our experience can be resolved by appropriate drafting.

Consider foreign exchange rules and forex hedging. 

Is the project company allowed to open accounts offshore? If so, are any consents and approvals required and how may this impact the project finance closing timetable?

What permits and authorisations are likely to be required as CPs – the detail will be determined by the country in which the Project is located. However, these will commonly include investment licences, work permits for expatriates coming to work on the mine site, tax and VAT registration. It is also often necessary to obtain the consent of the Minister of Mines in respect of the creation of any security rights in favour of the banks over the mining licence or the shares in the project company. Any project company is well advised to begin the application process early! 

Consider the structure of the finance documentation and closing

Consider the necessity for a common terms agreement (CTA) – a CTA acts as an umbrella finance document which would include terms common to all lending institutions and be accompanied by individual facility agreements with bespoke terms relevant to specific financial institutions.

Consider a split-closing if you require the finance documentation to be in place quickly, for example, for the purposes of a press release to the market – the execution of the CTA/loan agreement/intercreditor agreement would constitute ‘phase I’, which would be followed by the execution of security documentation and satisfaction of all other conditions precedent as ‘phase II’. 

Example: Clients have successfully adopted the split-closing approach previously, closing phase I within eight weeks from the signing of a Commitment Letter. 

In the event that the split-closing approach is adopted, negotiate bank commitment fees to run from first drawdown and not from execution of CTA/loan agreement. 

This will keep the banks incentivised to get all CPs satisfied as quickly as possible. 

If there is DFI/ECA involvement, appoint a lead DFI and lead ECA to facilitate negotiations vis-à-vis documentation.

Consider cost efficiencies of a cash sweep against the impact compulsion has upon cashflows – ie, mandatory prepayment of the facility from a percentage of revenues left at the bottom of the payment cascade for distribution to your shareholders. 

Be pro-active in relation to your information undertakings to the banks – agree a proforma management report with the banks which will also be satisfactory to your board members so that you can comply with your information undertaking by providing one monthly report.

Remember, project financiers will review Project Documents and Offtake Contracts

Create an experienced project management team. Banks will rely on such team’s expertise and show more flexibility in relation to certain project issues if they have faith in it.

Example: On a recent mining deal, contracts of less than an agreed quantum were not reviewed by the banks as they relied on the capabilities of the project management team to let such contracts.

Do not execute key contracts until they have been reviewed by the Independent Engineer and your own legal counsel.

Consider the contractual structure of the construction agreements and impact on cost overruns.

Assess a fixed price EPC over an EPCM structure with a risk/reward mechanism borne by the EPCM Contractor.

Consider a staged release of the cost overrun facility/reserve upon successful completion of construction milestones.

When negotiating the Off-take Contracts, consider the creditworthiness of the Off-taker and length of Off-take Contracts which should be acceptable to the banks.

Consider whether you need to raise additional debt for infrastructure/ equipment needed in connection with the mine?

Consider if the banks will lend without additional infrastructure being developed in tandem with the actual mine. For instance, how will the processed ore get to port?

Remember, banks will be particularly sensitive when it comes to transportation/shipment of processed ore as it is the sale of such products which will generate all revenues towards debt service. Will the development of any such additional infrastructure be debt financed? Consider flexibility required under the terms of the current mining project financing documentation to allow for additional debt.

Example: For instance, we have worked on projects where a railway for transporting materials, and a village for housing the workforce, was required. From experience, this would normally sit outside the project financing put in place to develop the mine. The infrastructure finance will commonly necessitate the creation of a new special purpose vehicle as borrower, the creation of new security and discussion in respect of cross default events.

Will equipment financing be required and what is the delivery timetable? (See the discussion above.)

Example: Where there is a significant mining fleet required, we have seen this being funded by standalone equipment financings (akin to asset financings).

Assess your ability to hedge the commodity

Banks will usually insist on a base level of commodity price hedging. Hedging protects the borrower (and its lenders) from price movements but also potentially limits the upside for shareholders in an environment where prices are rising. Assess whether hedging is appropriate given today’s deflated commodity prices. Consider that when commodity prices rise, you may be giving up the upside of any price increase.

Assess whether hedging and forward sale of mineral products can be implemented for the relevant commodity.

Plan when hedging should be effected. 

Consider what security you can give to hedge providers for hedging effected between execution of CTA/loan agreement and CP satisfaction?

Consider necessity of forex hedging (driven by denomination of the loans) and interest rate hedging.

Consider impact of any refinancing on hedging: commodity hedging should not be affected.

Do not underestimate environmental and social issues

Arrange for an environmental impact assessment to be carried out by a suitably qualified party. Such assessment should ensure that the project meets the World Bank Environment, Health and Safety Guidelines as well as the Equator Principles. 

Consider the cost impact of compulsory environmental rehabilitation funds to be deposited in a local bank account.

Do not underestimate the impact of social action groups and factor in costs linked to address their concerns which are often legally founded (such as resettlement of displaced population and rehabilitation of degraded land). With local communities highlighting their needs for social dividends, project companies have to increasingly focus on labour relation matters in order to ensure sustained production. These social
issues are particularly prevalent when development financial institutions are present within the banking group.

Example: We have seen the giving of undertakings vis-à-vis the construction of a village to accommodate the mine workers – which some would view as a project in its own right – included as a CP to funds being advanced by the project finance banks. 

Is political risk insurance (PRI) required?

Anticipate commercial banks’ requirement for PRI, and the terms of such cover where debt will be injected in remote locations in emerging markets.

Political risk insurance mitigates a variety of risks. Such cover may include repudiation of mining agreements, confiscation of fixed or mobile assets by a foreign government (including deprivation, nationalisation, creeping, expropriation / selective discrimination, forced abandonment and forced divestiture), political violence (war on land and terrorism) and/or inability to convert or transfer currency.

Further mitigants of political risk are set out below:

  • as far as possible, all bank accounts for the Project should be maintained in an offshore jurisdiction (central bank authority may be required if this is not permitted under a development agreement)
  • the offtake and hedging contracts should also make provision for payments to the project company to be made directly into such offshore accounts
  • ensure that disputes arising under the mining licence or development agreement are adjudicated in an independent forum, such as ICSID (the International Centre for Settlement of Investment Disputes) or UNCITRAL (the United Nations Commission on International Trade Law).

Schedule 1 – Banks’ due diligence checklist

Regulatory Framework

Mining law

  • What are the principal mining laws (the Mining Law)?
  • Which government ministry or department is responsible for their administration?
  • Who owns the minerals in the ground before a mining permit is granted?
  • Please provide details of the different types of mining and exploration permits that exist under the Mining Law.
  • What rights do each category of mining/exploration permit confer? Do they include the right to draw water or discharge waste for instance?
  • What is the duration of each of the different types of permit? May they be renewed; if so, how?
  • Do mining permits require governmental approval?
  • What obligations may a permit impose upon the holder (such as achieving a minimum expenditure per annum)?
  • Do mining and exploration permits provide for periodic reductions in the area of land covered by those permits?
  • Does a person need to own an interest in the land in order to hold a mining permit?
  • How may a permit be awarded – is there any criteria that must be satisfied?
  • How may a permit be upgraded (eg, from exploration to mining)?
  • How may a permit be transferred?
  • May a permit be charged or encumbered in favour of a third party? If so, how is it possible to ascertain whether a particular permit is subject to a charge or encumbrance? Is the consent of the government or any of its agencies required in order for a mining permit to be charged or encumbered?
  • How may a permit be registered – is there a method by which a search may be made to show the owner of a permit?
  • How may a permit be forfeited?
  • In order to be valid how do mining permits/leases need to be executed or issued?
  • Are there any other formalities to be complied with in relation to the issuance, renewal or use of mining permits?
  • Is the government entitled to acquire an interest in a mining company or its assets?
  • How does the Mining Law interact with other relevant legislation such as the fiscal and environmental legislation?
  • Are there any restrictions on mining companies in [country of mine location] being owned or managed by foreign persons?
  • Is there any underlying law or contract with the government that may establish a set (or preferential) legal and fiscal regime for a mining project and so override other applicable laws?
  • Are there any ongoing approvals or permits required for the mine’s operation?
  • Or prior to commencement of operations?
  • Are there any statutory obligations requiring the employment of local personnel or the use of local refineries or smelters?
  • What, if any, obligations does the Mining Law impose in relation to the sale of [relevant commodity] or the reporting of mining operations?
  • Are there any other provisions of the Mining Law that would have a material impact on the project or the sale or financing?
  • Are there any provisions relating to compensation for interference with land rights? Is there any case law on the subject?
  • Is the Mining Law valid? Is it in compliance with any constitutional aspects?

Applicable environmental law

  • Please provide a brief outline of applicable environmental law.
  • What are the applicable laws that deal with storage and use of diesel, toxic chemicals like cyanide, storage of tailings (processed ore and cyanide solution following ore extraction), water pollution, air pollution (smoke and dust)?
  • Please provide details of the nature of the liability arising for environmental damage and breach of environmental laws. In particular:
    • do environmental laws in [country of mine location] make provision for liability to be imposed on shareholders of, or lenders to, the Company?
    • do the environmental laws make provision for the directors, employees or officers of the Company, its lenders or shareholders to be personally liable for breach of the environmental laws?
    • is the potential liability under paragraphs (a) and (b) above civil liability or criminal liability (or both)?
  • Please provide a brief outline of applicable worker health and safety legislation and any particular requirements that have been enacted in relation to mining operations.
  • Is an environmental impact assessment and/or an environmental management plan required in order to construct and/or operate the mine? Are any other environmental plans and reports required?
  • Is there an obligation to consult with local communities and stakeholders when preparing any required environmental impact assessment and/or an environmental management plan? If so, was such consultation carried out?
  • Is it necessary to obtain any form of governmental or official approval for the environmental impact assessment and/or an environmental management plan? If so, has such approval been obtained and was it subject to any conditions?
  • What other environmental permits are likely to be required for the construction and operation of the mine?
  • Does environmental legislation impose any obligations in relation to the closure and/or rehabilitation of the mine? In particular, is there any obligation to set aside funds or post a bond or any other form of security to pay for mine closure or rehabilitation?
  • Which government agency/ministry is responsible for policing the environmental legislation and issuing the relevant permits?

Relevant land law

  • How is ownership of land established in [country of mine location]?
  • How is title transferred?
  • Is there a centralised land registration system, if not, how may title to land be checked?
  • How are easements (to provide access both by roads or for power or water pipes) created?
  • Is it possible for any planning and other consents required for the building and operation of the mine to be subject to appeals or judicial review claims by third parties?

Law in relation to government grants

  • Are any government grants or other assistance available in respect of the mine?
  • If so, what is the procedure for a grant to be awarded? How long does it take? What application needs to be made? Is a ministerial or parliamentary decision necessary? If an application is made correctly is there any discretion as to the grant being made?
  • What are the usual terms of such a grant? Do they impose obligations on the beneficiary?

Relevant employment law

  • Please provide an overview of the local employment legislation.
  • What generally does the legislation provide in relation to the redundancy or long service of employees?
  • What legislation is there to protect employees with long service?
  • Are there employment tribunals to regulate wrongful dismissal claims?
  • What legislation deals with unions? Does it protect them or give them any powers in any particular way?
  • Is there a state pension scheme or national insurance? If so, what are an employer’s obligations?
  • Please provide details of any bonus, retirement, profit sharing, incentive, compensation, pension or other employee benefit plans or agreements of the Company, and all significant employment, consulting, termination and severance agreements to which the Company is a party.

Other issues

  • Do the laws of [country of mine location] oblige the Company to obtain its insurances from insurers located in that country. If so, what percentage of the insurance risk is able to be reinsured with foreign reinsurers?
  • Please give a brief overview of the various liens that can be created by operation of law rather than contract in [country of mine location], particularly mechanics, tax and employee liability and similar liens, their creation and expiry/release.
  • Are there any requirements of worker’s compensation, employee superannuation, environmental or other local legislation that would customarily be addressed in construction contracts?
  • Please provide a list of all local government approvals required for the project and its component parts (including the approvals required in relation to each of the project documents) and the status of such government approvals.
  • Would a local court uphold the choice of English law with respect to contracts entered into by the Company in respect of the mine (eg, joint venture agreements, offtake agreements, construction contracts and financing documentation)?
  • Please comment on whether it would be advisable for the project documents to contain a non-exclusive submission to jurisdiction clause, submitting to the jurisdiction of courts outside of [country of mine location]. Would local courts enforce judgments obtained against the Company in an English court? 

Mineral development agreement/stability agreement 

Note: this paragraph 7 is only relevant if the Company or its shareholders have entered into any form of mineral development agreement, stability agreement or other similar agreement (Development Agreement) with the government or any of its agencies. 

  • Does the government have the power to enter into the Development Agreement and to perform its obligations thereunder? Is there any specific legislation in [country of mine location] that regulates or authorises development agreements?
  • Were all the required procedural steps for the government to enter into the Development Agreement carried out?
  • Does the Development Agreement contain any conditions precedent to be satisfied before it comes into effect? If so, have these conditions been satisfied?
  • Is there a right for any third party to prospect for or mine non-associated minerals in the mining contract area if the Company does not make an application to mine such non-associated minerals?
  • If so, has the Company made any applications to include the mining of nonassociated minerals within its mining licence? If not:
    • has any third party applied to prospect for or mine such non-associated minerals in the mining contract area?
    • is there any legislation which deals with such conflicting applications/claims?
  • Must the Company obtain any governmental consent if it is proposing to make changes to its mining plan?
  • If the Development Agreement provides that the Company may open and maintain foreign currency accounts offshore, must the Company obtain any other foreign exchange approvals?
  • Has the Company agreed to keep the government at all times indemnified against all actions, damages and demands that may be brought or made against the government by reason of authority given to the Company in the implementation of the Development Agreement?
  • If so, please confirm that the lenders will not be liable to make payments under this indemnity merely by the security trustee taking an assignment of this contract under the relevant security agreement.
  • Please advise how such indemnity would be quantified, and whether there is any cap on liability.
  • Under English law, only rights may be assigned and not obligations. Is this the same under the law of [country of mine location] and how will such law deal with the assignment of rights and/or obligations?
  • Does the Development Agreement state that a government body shall have the right to approve any assignment of shares in the Company?
  • Does this mean the consent of such government body is required for the shareholders of the Company to execute a share mortgage or for lenders to enforce the share mortgage?
  • In what circumstances will any government body be able to terminate the Development Agreement pursuant to the Mining Law and other applicable laws?
  • What will happen to all immovable assets and property of the Company on termination of the Development Agreement?
  • If disputes are to be resolved by negotiation and, failing that, arbitration, for what time period must the Company negotiate with the relevant government body before submitting a dispute to arbitration?

Tax issues

  • What documentary taxes or stamp duties will be payable as a consequence of entering into the project agreements and finance and security documents?
  • Will the Company be subject to or required to make any deductions in respect of local taxes, including withholdings, in respect of principal, interest or other payments to the lenders or other project parties?
  • Does the Mining Law or any other statute impose any obligation to pay royalties? If so, please provide details of the amount of those royalties and their method of calculation.
  • Are there any restrictions, withholdings or taxes in relation to the payment of management fees and other similar payments to affiliated companies?
  • Please provide details as to the manner in which transfer payments are treated under the taxation laws in [country of mine location]. Does the mining legislation impose any additional restriction upon transfer pricing or the payment of management fees? 

Lending and security issues

Creation and perfection of charges

  • What is the position under local law as to the granting and perfection of security?
  • The security package will be comprehensive and will secure all the assets of the Company. What are the correct instruments to create the security under local law?
  • Please confirm that on an enforcement of the lenders’ security, the lenders would have access to all the assets of the Company.
  • Please confirm that the local law security package will not be adversely affected by any change to the lending group. In particular, will any change in the lending group require further steps to be taken with respect to the security package?

Charges over specific types of property

(a) Security over real property interests
  • What are the extent of any third party rights in respect of their land rights and associated relocation? Please also advise how such compensation would be quantified and whether there is any cap on liability.
  • Is there a concept of a floating charge under local law and will any material change in the description of the assets included in the mortgaged property require repeating the notarial and registration process?
  • Over what assets can a separate chattel mortgage be taken?
  • Is possession of goods subject to a pledge necessary for perfection of the lenders’ security interest? If so, please identify which forms of collateral have such possessory requirement for perfection.
  • What wayleaves are required for implementation of the Project? Please outline what steps should be taken to ensure that the lenders have a perfected first priority security interest in any necessary wayleaves.
(b) Security over receivables
  • Is an assignment of revenues unenforceable on an event of default or insolvency?
  • If so, what are the benefits of implementing such assignment?
(c) Security over Mining Licence
  • Will the relevant government body’s consent be required to create a security interest in the Mining Licence?
  • Is there a central register of mineral rights?
(d) Security over the company’s rights under the Material Project Agreements
  • Can security be created over contractual rights by execution of either a pledge or an assignment? If so, please advise whether there are any benefits to the lenders in using a pledge rather than an assignment.
(e) Security over onshore bank accounts
  • How can onshore bank accounts be secured under local law? Please confirm that this analysis is the same whether the bank account is held by a local company or the local branch of a foreign company.
(f) Security over intellectual property
  • Does the Company have any intellectual property over which security should be taken?

Shareholder Security

  • Will the courts of [country of mine location] recognise the right of a security trustee holding share certificates and stock transfer powers executed in blank to be registered as the shareholder in accordance with the terms of a share mortgage? Would the court also recognise the right of any third party purchaser of the shares to be registered as a shareholder upon presentation of the share certificates and completed share transfers?
  • Is there any benefit under local law in having the share mortgage recorded on the Company’s register of shares to provide notice to third parties that all the shares in the Company are subject to the share mortgage?
  • Under local law, will the fact that the Company has local branch offices have any impact on this share security?
  • If the financing plan contemplates the use of both senior and subordinated debt, will a local court give effect to the contractual terms of subordination in an English law intercreditor agreement (which may include limitations on enforcement, rights to receive payments and turnover clauses)? Would such an English law intercreditor agreement survive the insolvency of the Company?
  • Will the lenders be subject to any banking or other regulations solely by virtue of their advancing loans to the Company and/or upon the enforcement of their security? What if any political risk insurer/guarantor participates in the project through its rights of subrogation?


  • Please discuss local bankruptcy/insolvency law. Specifically, if the Company enters into bankruptcy or similar proceedings:
    • would a trustee or receiver be appointed to manage the company?
    • would the remedies normally available to the lenders pursuant to traditional finance documents be stayed?
    • would interest on loans continue to accrue?
    • would the lenders have a preferred position or will they have to share the assets of the Company equally with other creditors? Would creditors such as employees and the government (eg, taxes) have priority?

  1. CP: Conditions precedent are those conditions which a borrower needs to satisfy after execution of the finance documentation in order to draw down debt and usually include the obtaining of various licences, permits and consents.