The Differing Perspectives of Junior and Major Mining Companies in Joint Ventures
July 9, 2012
Exploration and development joint ventures between major mining companies and junior mining companies are very common for many reasons, the most important of which being the complementarity of their respective assets. Junior mining companies (juniors) frequently assemble rights to interesting, or at least untested, mineral properties, which they are however unable to adequately develop because they lack the required financial and technical resources. At the same time, major mining companies (majors) have significant financial and technical resources, yet often struggle to acquire promising new properties.
Depending on market conditions, it may be very difficult for a junior to obtain debt or equity financing in order to engage in mineral exploration, and skilled professionals are in short supply in the global mining industry. As a result, the prospect of having a well-funded, well-staffed major finance and manage the exploration of a property, in exchange for a percentage interest in the property, is often very attractive to a junior. Joint ventures of this type are also attractive to majors for a number of reasons. One reason is their concern to avoid overpaying for properties that may never become good development prospects. With a joint venture, the major acquires, in effect, a modestly priced option to earn a majority interest in a property. The junior meanwhile is pleased to retain a significant portion of the property’s upside potential.
The typical joint venture allows the major to earn a majority interest in a property by funding exploration work in stages over a defined period. The major — or a major’s subsidiary — is given the authority to manage the work and staff the project with its own personnel. It can moreover often increase its interest by exercising an option, or options, to fund and conduct additional work.
Despite the simplicity of the general concept explained above, the negotiation of joint venture agreements in the international mining industry can sometimes be surprisingly difficult due to the differing perspectives and motivations of juniors and majors. This article seeks to briefly describe and explain some of the main tension points between juniors and majors which appear repeatedly in joint venture negotiations.
Perspectives on Earn-Ins and Options
The first key tension point that is often encountered centres on the timing and conditions for the vesting of a major’s interest. Juniors are often wary of majors’ perceived power, and they may be apprehensive about prematurely giving up the leverage that comes from their status as holders of mineral rights. Therefore, they frequently resist giving up any mineral rights or titles until majors have put up their money, or otherwise satisfied the conditions for vesting of their interests. They also prefer to retain some oversight over the satisfaction of those conditions.
Majors, on the other hand, do not like spending money on a project before they have legal rights over it. Thus, they often require that their initial interest in a property vest immediately upon the signing of a joint venture agreement (but, of course, subject to divestment if they fail to satisfy their earn-in obligations).
Two related issues are the amount of time that a major has to perform its initial earn-in obligations and the circumstances under which a major can abandon a project. Majors want to be allowed as much time as possible to earn their interests. A longer option is worth more than a shorter one, and they want to remain as unfettered as possible in terms of their right to walk away.
Juniors, in contrast, are worried that majors may simply sit on projects. Juniors want majors to come in and do the work, or else get out of the way. They prefer short option periods, requiring majors to invest significant money to maintain a project’s forward trajectory.
Furthermore, juniors prefer to avoid the trouble of negotiating a joint venture agreement if they are not assured that at least some amount of work will get done. Thus, they may insist that the major cannot abandon its interest until it has done a minimum amount of work.
Perspectives on Spending and Project Scale
Other conflicts often arise in connection with decisions related to spending. Juniors are frequently apprehensive about excessive spending; majors, in contrast, are concerned about having a project hampered by a junior’s inadequate financial resources.
During the earn-in phase, juniors worry that majors may conduct exploration work and studies to an unnecessarily high standard, leading them to fulfil their expenditure obligations through spending on items that juniors view as unnecessary and that slow progress. Juniors are discomforted by the prospect that majors may earn their initial (expenditure-based) project interests yet produce little to show for their spending. A junior’s concern is often even more pronounced in relation to the joint funding phase. After the major’s initial earn-in and its fulfilment of any options requiring further sole-funding, the junior must fund its proportionate share of all project work, notwithstanding the fact that the major typically has complete or nearly complete discretion to determine the nature and cost of such work. Juniors may fret that they will not be able to satisfy their funding requirements, the result of which is typically that their interests are diluted. They are particularly loath to see their interests diluted as a result of spending that they view as excessive or unnecessary.
Majors nevertheless often gauge that they must retain tight control of programs and budgets in order to ensure that a project is studied and developed to their own standards. They are not frequently willing to cede discretion over budgets or spending to juniors. A major will see itself as having been brought into a project as a result of its superior technical know-how and it will refuse to have a junior interfere with its professional management of project programs and budgets, especially when the junior’s positions may be motivated more by financial hardship or investor relations concerns than technical concerns. Generally, a major will also worry that its junior partner may use any veto power as leverage to force a buy-out of the junior by the major or to achieve some other objective not originally bargained for, such as additional financial support from the major. In this way, the junior may seek to neatly benefit from the value-creation of the major’s exploration, without incurring its share of the costs necessary to complete studies or develop a project.
As a related matter, juniors, in addition to generally wanting to see work completed economically, are often interested in pursuing studies and development geared towards smaller, easier-to-develop projects; majors tend to be interested in seeing the greatest possible long-term value-creation, and this often implies a larger project that is more costly to develop.
Perspectives on the Powers and Responsibilities of the Manager
Other important tensions are linked to the powers and responsibilities assigned to the management entity, which is typically a local subsidiary of the major. The major will wish for this entity to have as much power as possible.
While a junior of course welcomes a manager’s assumption of responsibility for day-to-day affairs, it will also wish to retain some control over a project, partly in order to address some of the concerns around earn-in verification and spending noted above, as well as for other reasons. Not surprisingly, juniors prefer that as many protections as possible be built into joint venture agreements so that their consent is required for as many of the manager’s decisions as possible.
The level of legal responsibility that is assumed by the manager — and indeed the major itself — is also topic for discussion. Majors wish for relationships to be purely contractual, with there being no fiduciary duties and no responsibilities that aren’t based on explicit arm’s length contracting. A junior will often assert that, in exchange for it yielding control to a major, the major or the manager should assume some special responsibility to act in the junior’s best interest, or at least in the best interest of the joint venture as a whole.
Another issue is the extent to which a manager may charge its overhead costs to project accounts or have those costs counted for purposes of the major’s funding obligations. Juniors are, as noted above, generally concerned about excessive spending by majors. They are therefore sometimes bothered by the idea that they may see their interest in a project reduced (through either the satisfaction of earn-in conditions or the operation of dilution provisions) as a result of spending the manager would have gone ahead with irrespective of the project or the joint venture. They do not wish to be forced to absorb a share of a major’s substantial fixed costs. Majors, in contrast, commonly assert that it is entirely appropriate for them to charge overhead to a project. They reason that though they have teams of people, equipment and structures in place regardless of any specific project, once those resources are deployed to support a given joint venture, as opposed to being put to use on any number of other possible projects, the costs associated with them are properly allocable to the joint venture.
Perspectives on Minority Protections
Tensions of course arise in relation to minority protections for junior companies. As discussed above, juniors are naturally interested in conserving for themselves as much power and control as possible, while majors desire not to be constrained or hampered as a result of leverage conceded to a junior.
It should be noted that a junior is often motivated to some extent by its concern that the value of its minority interest (in a third-party sale) may be reduced by the concession of too much control. They usually want their interests to carry control premia.
Discussions around this general theme often focus on specific minority protections, which juniors would like to have and which majors oftentimes would sooner not grant. In particular, juniors seek minority protections (usually in the form of supermajority voting requirements, which effectively confer vetoes) in respect of such matters as:
- disposals of project assets;
- dividend or distribution policies;
- project financing;
- the granting of security interests over project assets;
- affiliate transactions (i.e., between the project management company and other companies in the major’s corporate group);
- mine development decisions (i.e. decisions to proceed with mine development, which are discussed under the next heading) and
- decisions to cease or curtail commercial production once a mine is up and running.
Depending on the circumstances of a transaction or project, majors may be willing to concede minority protections in some of these areas.
Project financing is an area of particular tension. Majors need to be assured of their ability to go ahead with a project, irrespective of the availability of financing for the junior to fund its proportionate share. At the same time, they do not wish to be forced to "carry" a junior by providing or obtaining financing for it or providing guarantees on its behalf. If the major has the capacity to obtain or provide financing on the junior’s behalf, it would typically rather obtain or provide that money on its own behalf and see the junior forced to accept some dilution. Juniors, as is noted above, have an acute fear of precisely this: their forcible dilution out of projects due to their lack of financing for development. As a result, they will insist on minority protections that give them some discretion over project financing (as well, often, as discretion in respect of development decisions themselves), or, alternatively, contractual provisions that require majors to obtain financing for juniors if the majors themselves want to see projects financed. Sometimes majors will concede to "carrying" juniors in some way in respect of financing in exchange for increases in their proportionate project interests. Alternatively, a major may be willing to agree that participants have a longer period of time in which to raise financing following a development decision.
Perspectives on Development Decisions
Project development decisions are a particularly sensitive area for negotiation. Juniors are often concerned about having such decisions made without their consent, particularly if they will be unable to fund a project and will face dilution. Therefore, they often seek vetoes over these decisions. However, in other cases, juniors are instead more concerned that majors may fail to opt for mine development even when a favourable feasibility study exists, perhaps because the majors might prefer to dedicate capital to projects they deem more worthy. Therefore, juniors sometimes attempt to negotiate further minority protections in the form of provisions that give them some power to force development decisions.
Majors’ concerns surrounding development decisions essentially mirror juniors’ concerns. They do not wish to have their ability to force a development decisions constrained — especially for reasons related to the financial condition of juniors. However, at the same time, they do not themselves wish to be forced to allocate capital to a project, which, although perhaps economic, does not represent the best possible use of scarce capital at the time within their portfolio of projects. From the perspective of a major, it may sometimes make sense to earn into a project, but then delay development until economic conditions are optimal, especially if the major has other projects in development.
The foregoing scenario is of acute concern to juniors. Few things worry a junior more than a major sitting on its sole project and refusing to move ahead with development while also refusing to step aside. Nonetheless, it may also be said that majors have similar concerns regarding juniors, in relation not only to development decisions, but all minority protections — that is, concerns that such protections may be abused by juniors in order to obtain other advantages (such as more time to raise money).
Perspectives on the Use of Experts
In the absence of relevant minority protections, a major will want the board of directors or the management committee it controls to definitively decide upon as many issues as possible. In contrast, a junior will be interested in having the ability to force expert referrals as often as possible. Any such ability gives the junior leverage and amounts, in effect, to a type of attenuated minority protection in relation to the specific matter referable to an expert. For instance, a major will typically prefer that any mine development decision to be a simple matter for decision by the board of directors or management committee that it controls. The junior may argue for a veto. However, if it is unable to negotiate a veto, the junior may instead propose that the board of directors may only make a development decision the basis of a "bankable feasibility study" and propose further that any dispute about whether a particular study is in fact a bankable feasibility study be resolved through a time-consuming referral to an expert.
Because of majors’ desire to avoid the uncertainty and delay of referrals to experts, and the leverage that such referrals therefore give to juniors, discussion about what is and what is not referable to an expert can be a notable source of tension in negotiating a joint venture.
Perspectives on Exit
Many of the differences in perspective explored above are rooted in a more profound difference in perspective, which centres on the timing of a party’s exit from a joint venture project. Often, the best time for a junior to exit a project is at the end of the exploration and study phases, and before any major development expenditures. Ideally, a junior can exit a project by selling itself or its interest to the major or another company before the end of the work sole-funded by the major (through its earn-in and option phases). At this point, the value of the property will be well established, and the junior can typically earn a significant return on its investment by exiting before it enters the long period of successive capital contributions that leads up to commercial production. A junior would often rather exit early and use its money to fund new exploration projects (which is typically what juniors do best) or put the money to other uses.
Majors, in contrast, are not typically interested in early exits. They have the financing and the time horizons necessary for higher long-term returns on investment that come through developing and operating a mine through the end of its life. The development and operation of a mine is typically the ultimate objective of a major when entering into a joint venture, not the realization of a gain on the sale of the property.
Because of this fundamental difference in perspective, tensions often arise in the both the negotiation and operation of joint ventures. Juniors often prefer to keep their options open as much as they can. They will seek contractual powers that give them leverage or exit options or that they may use to induce majors to purchase their interests. Majors meanwhile are frequently worried about juniors’ perceived short-term thinking and its potential negative effects on successful project development. Neither perspective — the junior’s or the major’s — is wrong; reconciling them is part of creating a successful joint venture.