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A company perspective on doing business in the former Soviet Union: a mining venture in Kazakstan
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Resources Policy. Vol. 23, No. 3, pp. 137-146. 1997
Pergamon
PII: S0301-4207(97)00022-6
© 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0301-4207/97 $17.00 + 0.00
A company perspective on doing business in the former Soviet Union: a mining venture in Kazakstan Michael J Neumann Senior Counsel, BHP Minerals, Legal and Land Department, 550 California Street, San Francisco, CA 94104-1020, USA
BHP Minerals recently applied for and received a license to conduct exploration and mining of gold covering an area of in excess of 2.5 million acres in Kazakstan. The license required that BHP negotiate an agreement with the Government. The agreement had to clarify the conditions for conducting operations, augment existing laws and regulations, and address fiscal and other terms which would impact the commerical viability of any potential discovery. This paper reviews the complex acquisition and negotiation process from the perspective of a foreign investor conducting exploration activites in emerging countries which are moving from a c o m m a n d economy to a market driven economy. © 1997 Elsevier Science Ltd. All rights reserved
Introduction
This paper reviews BHP Minerals' t efforts to acquire exclusive exploration and mining rights in Kazakstan. BHP's experience is reviewed in the context of emerging countries that are moving from command to market economies and are modifying existing mining codes or adopting new mining codes to attract foreign investment. BHP Minerals made an application to The Ministry of Geology and the Protection of the Subsurface of the Republic of Kazakstan ('MinGeo') for an exclusive 25 yr combined exploration and mining license on 24 June 1994, "under risk conditions ''2 to use the sub~BHP Minerals is a business group of The Broken Hill Proprietary Company Limited (ACN 004 028 077), Australia's largest industrial and natural resources company. BHP conducts exploration and mining throughout the world. 2The Kazaks use the term "under risk conditions" to refer to the fact that there is no known mineral deposit and that all exploration investments are made under the risk that a discovery of valuable minerals will not be made. Because the risks are unknown, the investor should be able to negotiate more favorable terms in the negotiated License Agreement. Securing this 'risk' status is itself
surface for exploration and mining of gold in the area surrounding Zhetigara in the Kostanai Oblast. The project area consists of 2 640 950 acres in the north central part of Kazakstan, on the Russian border. Competitive bids were invited and BHP Minerals won the tender. The license was issued in February 1995, on the condition that BHP and the Government negotiate and enter into a formal Agreement for the Use of the Subsurface ('License Agreement') before 14 August 1995. This was the first License Agreement for hard rock minerals to be negotiated between the Licensing Body 3 and a foreign investor. The negotiation process for BHP Minerals was complicated because Kazakstan was just emerging from a Soviet style command economy and the governing rules were embryonic. Many of the Kazaks with whom we had to negotiate, like their Russian a matter to be negotiated with the Kazaks (at the stage of making the application for a license). 3The Government was represented by the Licensing Body, which was formed under Resolution No 7-73R, dated 18 July 1995, by the First Deputy Prime Minister of the Republic of Kazakstan.
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Mining in Kazakstan: M J Neumann counterparts, had only a superficial understanding of the way business is conducted in the West. Consequently, the negotiation process was prolonged to allow each party to educate the other party as to their mutual expectations and to identify the most appropriate resolution for perceived differences in how to conduct business. Although Kazakstan offers foreign investors a fairly transparent legal regime for securing exclusive mineral rights, there remain ambiguities and omissions in the tax and investment laws which must be resolved through negotiation of a formal agreement with the Government before investors will want to proceed with development of a mining project. There also exist bureaucratic obstacles which investors must anticipate and circumnavigate in the negotiation process. These are matters which BHP was able to successfully address and are discussed in this paper.
Investment climate Before investing time, money and effort initiating an exploration project or acquiring an interest in a mineral deposit in any foreign country, BHP Minerals first evaluates: (i) the potential for finding a valuable mineral deposit; (ii) the ability to mine the deposit if one is located; (iii) the ability to sell the processed mineral at a profit in the world markets; and (iv) the ability to manage risk. Once this preliminary evaluation has been completed, BHP then compares and prioritizes its investment opportunities located throughout the world.
Comparing legal and fiscal regimes In comparing projects, BHP Minerals not only evaluates the geologic merits of each project, but also evaluates the legal process under which it may secure an exclusive right to explore for and mine a mineral deposit. BHP Minerals targets legal systems that are both transparent and grant secure and exclusive legal rights to explore for and mine minerals. A legal system that allows discretionary government approvals or unilateral government revisions of an operating agreement will deter our investment in that country. The governments of the former Soviet Union and other emerging nations are continuing to modify or replace their mining and investment laws to compete for and encourage foreign investment. The following is a synopsis of what we found in Kazakstan compared with Russia. The Government of Kazakstan recently adopted a more transparent legal regime that allows a foreign investor to establish and secure, by registration, mineral rights. 4 Article 11, Section 1 of Edict No 2828
4This is evidenced by passage on 27 January 1996, of Edict No 2828 Concerning the Subsurface and its Utilization, which replaces the Code of the Republic of Kazakstan on the Subsurface and Processing of Raw Minerals of 30 May 1992.
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confirms that foreign persons and foreign legal entities, including foreign states and international organizations, shall have the same right to use the subsurface as citizens and legal entities of Kazakstan. 5 Notwithstanding that a country's legal regime may be transparent, the tax regime or fiscal terms of negotiated agreements may prove to be a deterrent to investments. Both Kazakstan and Russia require foreign investors to negotiate a signing bonus, a commercial discovery bonus, and a production bonus in addition to other very significant mineral holding costs. Additionally, both countries require that license holders reimburse the government for historical expenditures incurred by the government in conducting exploration within the license area. Kazakstan permits royalty rates to be negotiated and the Government may seek to negotiate an excess profits tax in addition to the profits tax of 30%. Russia does not permit negotiation of the royalty rate, although proposed production sharing legislation would permit such rates (and tax rates) to be negotiated. After several attempts, however, the Russian government has failed to adopt production sharing legislation. Both countries impose a value added tax. Unless these prohibitive fiscal terms are negotiated to more commercially acceptable levels, only an exceptionally robust exploration project would be considered for development in either Russia or Kazakstan.
Ability to market production A foreign investor, like BHP Minerals, must assess whether it will be able to freely export minerals which it mines and sell them at world prices to realize a reasonable return on its investment. In today's market economy, all mining projects are high risk investments and demand a long term investment strategy. An investor must be able to ascertain all conditions that influence a project's ability to recoup its investment and earn a return on the investment commensurate with the risk. International mineral investors operate in a global market and must be able to quickly adapt their operations in response to prevailing market conditions. They require the freedom to mine minerals at production levels supported by world markets, rather than by quotas established by governments, and the freedom to sell their mineral product in international markets at international prices and for hard currency. The former Soviet Union was a command economy requiring mine producers to sell their required quota 5Although Edict No 2828 does not require that the foreign investor register a representative office or a branch, nor establish a local legal entity (either through incorporation of a new company or by incorporating a formal joint venture entity), the Government did require under the terms of BHP Minerals' License Agreement that BHP register a branch following registration of the License Agreement.
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of production to the Soviet government at prescribed prices. It was a rigid and inflexible economy run by and for the government. A mining operator had no contact with world markets and was required to achieve production levels prescribed by a state expert on reserves. These production quotas were not determined by market or operating conditions. Although many attributes of a command economy continue to linger in both Russia and Kazakstan, such attributes appear to be disappearing more quickly in Kazakstan. In attempting to liberate its economy from being a command driven economy, Kazakstan has adopted the Foreign Investment Law and the Decree "On State Regulation of Relationships Involving Precious Metals and Precious Stones" (the 'Decree'). The Decree went into effect 22 July 1995, and provides for the export of gold and other precious metals by foreign investors and domestic entities with foreign participation. The Decree provides producers the right to export ore for the purpose of refining. For the first time, Kazak law provides foreign investors the opportunity to export precious metals produced in Kazakstan. Although the Decree represents a decisive step toward establishing the legal framework for foreign investment in the Kazak precious-metals sector, Edict No 2828 (adopted on 27 January 1996, replacing the 1992 mining code) moves Kazakstan in the opposite direction and perhaps contradicts the intention of the Decree. Article 67 of the Edict provides that the Government has the pre-emptive right to purchase all useful minerals out of the share of the foreign investor at prices which do not exceed the market prices in the international market. The maximum volume that may be so purchased by the Government and the specific terms of this pre-emptive right must be negotiated in the license agreement. Another matter for foreign investors to consider is the ability to physically transport mineral production beyond the borders of Kazakstan. Kazakstan, like many other countries within the former Soviet Union, is landlocked. Russia has the ability to deny Kazakstan production access to international markets. This ability is far weaker with regard to precious metals and stones than is the case for bulk mineral commodities such as oil, gas, pig iron and copper, which are more difficult to transport. David Horley, of the European Bank for Reconstruction and Development, was quoted as saying "The beauty of precious metals is that you load the ore on a plane and wave at the Russians as you fly over their c o u n t r y " . 6
Managing risks Ideally, risk mitigation requires that an investor: (i) properly evaluate all risks (both on a country basis and on a project basis); (ii) insure what risks it is able 6The National Law Journal, 4 December 1995.
to insure; (iii) prepare a risk management plan; (iv) develop a funding strategy for each project from an early stage; and (v) develop a decisive exit strategy. One approach BHP Minerals attempts to employ for managing risks in a country perceived to be a high risk country is to advance the exploration project in stages, with each stage being identified by a higher level of investor commitment to both the project and the country. If at any stage the decision is made to withdraw, BHP does its best to have a clearly defined exit strategy. Exit strategy The exit strategy is, in large measure, contingent upon whether BHP Minerals desires to tactically withdraw from the project and/or country, or to protect and benefit from any value it has added to the project. A successful exit strategy depends on our ability to transfer our mineral rights in the project to a third party and to limit our legal obligations. Our recent experience in Mongolia, which has been influenced by Russia and is in many ways similar to Kazakstan, has focused our attention on specific problems that could arise from an attempted tactical withdrawal from a joint venture agreement. Article 17 of the Foreign Investment Law of Mongolia provides that the winding up or dissolution of a joint venture with foreign investment requires a resolution approved by all of the parties to the joint venture to terminate both operations and the joint venture. The joint resolution must by submitted to the Ministry of Trade and Industry. Only after proper verification that all liabilities and obligations of the joint venture have been fulfilled will the Minister authorize dissolution of the joint venture with foreign investment. The effect of Article 17 is that one party to a joint venture cannot unilaterally withdraw from or terminate the joint venture, regardless of whether the other party is in material breach of the joint venture agreement. A foreign investor must recognize that dissolution of a joint venture may be viewed by the local partner as having negative political perceptions within the government. If that is the case, then the local partner, like BHP's local partner, may be unwilling to terminate the joint venture. Because the ability to terminate a more formal relationship with a local partner in a country like Mongolia, Russia, or Kazakstan might prove to be difficult in law and in practice, it may be preferable to enter into a binding, but less formal Heads of Agreement, Memorandum of Understanding, or Protocol with that partner. 7 Each of these countries recognizes simple partnerships and contractual rights. All of the key commercial terms would be agreed 7This is assuming that the foreign investor will have a local partner. BHP Minerals was required, under the conditions of its License Agreement, to establish a joint venture with local Kazak entities. This type of circumstance is discussed further under the topic "Government Participation".
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upon and the parties would defer entering into the more formal joint venture agreement (and establishing the legal joint venture enterprise) until such time that there is a geologic, legal, or other justification for establishing the more formal legal relationship between the parties. An additional consideration in defining an appropriate exit strategy is to determine whether, upon early withdrawal or termination, work commitments are considered a debt in the host country or whether the host country will require a performance guarantee. Exploration licenses in Kazakstan may have primary terms of 6 yr 8 and require a work programme and agreed upon level of minimum expenditures over the full term of the license. Although Edict No 2828 does not require a performance guarantee, nor does it stipulate that the minimum work commitment is to be considered a debt owed to the Government, it is very likely that the Licensing Body will negotiate a form of guarantee in the license agreement. It is, therefore, preferred to negotiate more rational expenditure levels over the full term of the license, or, alternatively, to mutually agree that such work obligations are to be fulfilled on the basis of the type of work to be performed (rather than on the basis of the level of expenditures). In defining an appropriate exit strategy, BHP Minerals also determines whether its mineral rights will be transferable and what type of restrictions may apply to such a transfer. In many countries prospecting and exploration licenses may not be transferred, or may be transferred only with the prior approval of the host government. Edict No 2828 has made significant progress in expanding the right of a foreign license holder to transfer its rights and obligations under a license. Article 14 permits a license holder to convey to a subsidiary company without requiring permission from the Government and a license holder may convey to any other entity with permission from the Licensing Body. Developing an appropriate exit strategy requires that a foreign investor understand and anticipate its ability to withdraw from and terminate a joint venture, identify what its continuing liabilities will be, and determine its ability to transfer its interest in the license to a third party. A foreign investor must identify appropriate methods to protect and benefit from any value it has added to a project.
Bureaucratic obstacles Access to the right party In some countries, a foreign investor may not be permitted direct access to various departments with which it desires to meet until it has first met with the representative from an agency whose primary
SArticle 34, Section 1 of Edict No 2828.
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responsibility is to monitor and interface with foreign investors. This filtering of contacts and negotiations creates inefficiencies and problems for foreign investors. Prior to 1995, in Kazakstan there existed a close political alliance between the National Agency for Foreign Investment under the Ministry of Economics (the 'Agency') and the Kazakstan Research Institute ('Kaznedra'). At that time, BHP Minerals could not make direct contact with various governmental departments without first obtaining the permission of and introduction from the Agency. Our geologists were initially misdirected by the Agency and instructed to negotiate a joint venture agreement with Kaznedra, although Kaznedra had no legal rights to geologic data nor to minerals within the area our geologists were interested. Failure to negotiate with Kaznedra resulted in the Agency denying our geologists access to the subject area.
Jurisdictional conflicts Prior to the Kazak Government privatizing various governmental functions and inviting foreign investors to participate in or assume those functions, all exploration activities were undertaken and administered by The Ministry of Geology and the Protection of the Subsurface of the Republic of Kazakstan ('MinGeo') through local geological departments. All mining of precious metals and stones was undertaken exclusively through the state chartered National Joint Stock Company Altynalmas ('Altynalmas') 9 or its local mining enterprise. All gold and precious metals produced from mining were sold to the National Bank of Kazakstan at prescribed prices. Altynalmas was and remains under the authority the Minister of Industry and Trade of the Republic of Kazakstan ('Minpromtorg').l° There was no apparent conflict between MinGeo and Minpromtorg because both functioned as mere extensions of the Kazak Government. The Government was the explorer, the miner, and the owner of the product. The Kazak Government no longer subsidizes exploration and now allows other mining enterprises to compete with Altynalmas. MinGeo and Minpromtorg encourage their previously subsidized local departments and mining enterprises to seek foreign partners to fund their projects. Consequently, these various local departments and mining enterprises may make competing and conflicting claims to the same project area, especially the more attractive areas. During the initial stages of privatization, jurisdictional conflicts were amplified in the licensing process because all exploration licenses were issued by Min9Altynalmas has lost its national charter and is now a joint stock company, thereby losing its exclusive right to mine precious metals and stones. "~Having been authorized by the Decree of the Cabinet of Ministers of the Republic of Kazakhstan No 882 dated 27 June 1995.
Mining in Kazakstan: M J Neumann Geo while all mining licenses and combined licenses were issued by Minpromtorg. A n u m b e r o f Kazak governmental bodies were and are assigned various roles in relation to exploitation o f mineral resources. Unfortunately, their roles are rather poorly defined, which leads to jurisdictional conflicts. The G o v e r n m e n t has taken significant steps to address the major jurisdictional conflicts between M i n G e o and Minpromtorg through recently enacted legislation.~ t Under authority of this legislation: • the Cabinet o f Ministers is authorized to establish procedures for the exploration and development o f natural resources; • M i n G e o is now authorized to issue all mineral licenses, including exploration licenses, mining licenses, and combined licenses; • a Licensing Body, representing the full Cabinet o f Ministers, has been delegated the authority on behalf o f the Cabinet o f Ministers to negotiate all License Agreements between the licensee and the Government; and • Minpromtorg is authorized to execute all License Agreements on behalf o f the Government. The consequence o f minimizing such jurisdictional conflicts in Kazakstan has been to establish a more rational, transparent and orderly environment for foreign investment. B H P Minerals was able to finalize a license agreement with the Government, initiate and carry through an exploration program, and subsequently enter into separate contracts with both Altynalmas and the local exploration department of MinGeo. Multiple uses Minimizing the potential for conflicting uses is an attractive inducement for any exploration project in a competitive environment. Because emerging countries have an urgent desire to develop mines and exploit minerals to stimulate their economies, this is one aspect o f mining law reform which receives very little attention from the perspective o f the investor. In contrast to Tunisia, where minerals are classified and licenses are issued for mineral ' g r o u p s ' and multiple permits m a y not be issued for discrete minerals included within the same ' g r o u p ' of minerals and fall-
~Edict No 2828 Concerning the Subsurface and its Utilization; the Decree of the President of the Republic of Kazakstan 'On Additional Measures for More Orderly Use of the Subsurface for Geologic Exploration and Mining of Subsurface Resources' (5 April 1994; No 1637); the Resolution of the Cabinet of Ministers of the Republic of Kazakstan "On Procedures for Providing the Subsurface for Geologic Exploration. Mining of Subsurface Resources and Use for Other Purposes" (13 April 1994; No 377); the Regulation on Procedures for Licensing the Use of the Subsurface in the Republic of Kazakstan, approved by Resolution No 886 (8 August 1994) of the Cabinet of Ministers of the Republic of Kazakstan; and the Decree of the Cabinet of Ministers (No 882, 27 June 1995).
ing within c o m m o n boundaries, ~2 Kazakstan does not classify minerals by groups and multiple licenses may be issued for discrete minerals located within the same boundaries. ~3 There exists a significant risk in Kazakstan that conflicting uses will arise within a license area. Attempting to minimize the potential for such conflicts, B H P Minerals actively participated in and assisted M i n G e o during the tender process. W e attempted to provide for a more comprehensive definition o f minerals for our Zhetigara project. ~4 H o w ever, M i n G e o was not prepared, at that time, to allow more than one mineral to be made the subject of a license. W e were subsequently able to expand the definition of minerals in our License Agreement to include gold and all 'byproducts'. Federal vs Local jurisdictional conflicts Allocation of rights to exploit major mineral deposits is usually controlled by the federal or state government, while rights to minor deposits are usually controlled by regional or local governments. In Kazakstan there is no tax imposed upon foreign investors by the local administrations. Local administrations in Kazakstan do, however, negotiate rental payments for surface land use (these payments, which m a y be substantial, are intended to support the social infrastructure within their region). There does not appear to be any significant overlap between the Kazak federal government and the local governments with regard to either the licensing of minerals or imposition of taxes. Before B H P Minerals proceeded with its exploration project in Kazakstan, it wanted to determine that such conflicts did not exist and then identify what agreements would need to be negotiated with the local administrations and when those agreements should most timely be negotiated. Acquiring data An obvious way to induce serious foreign investors to consider exploration and development opportunities and to participate in tenders is to make available to them as much geologic data and maps as possible for little or no cost. In practice, however, this has proven to be most difficult in Russia and other countries of the former Soviet Union. All geologic data and information is ' o w n e d ' by the G o v e r n m e n t in Russia. While a c o m m o n geologic data package will be provided to all participants o f a
~2Article 5 of The Decree on Mines provides that an exploration permit and mining concession shall be issued for all minerals falling within the same 'group'. Article 1.3 provides that Group 3 minerals include all metallic substances, such as bauxite, silver rare metals, chromium, copper, iron, tin, nickel, gold, lead, zinc, etc. ~3Article 35, Section 1 of Edict No 2828. ~4pursuant to Article 7, Section 4, MinGeo has authority to define the list of minerals to be made the subject of a tender. Article 7 also provides the basis of MinGeo in establishing all other conditions of the tender.
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Mining in Kazakstan: M J Neumann tender for a prescribed price, detailed geologic data will only be provided to the winner of the tender. In Russia detailed geologic data is considered to be a 'secret' and is restricted to license holders, thus preventing potential investors access to meaningful data to assess the merits of an investment. Most importantly, the export of data from Russia is restricted and disclosure to foreign parties amounts to an 'export' of data. A foreign investor must find creative ways, usually by contract, to overcome these secrecy restrictions. The Kazaks have attempted to address the type of problems found in Russia associated with acquiring geologic data. The Kazaks permit data to be acquired through a negotiated purchase from MinGeo, whether or not the purchaser is the license holder and whether or not there is a tender. In addition to this negotiated price, both the Kazaks and the Russians still charge the license holder for all historical costs incurred by the Government's geological departments in generating all maps and data within the license area. ~5 These costs are to be paid as a charge against future mining revenue generated from within the license area. These costs can be substantial and will most likely be a matter of significant negotiation in any subsequent license agreement between an investor and the Government.
Negotiations with the Government General overview As an international investor, it is B H P ' s preference that operating and fiscal terms be clearly defined within the context of the mining code and existing legislation of the host country rather than to have those terms negotiated with the host government. If negotiated terms differ from or contradict existing legislation, then the negotiated agreement must be established as a normative act; the agreement must be enacted as a law. This process is costly, time consuming, and inefficient both for the investor and the host government. Such a negotiated agreement would be difficult for the government to administer because each agreement would be unique and require administration separate from all other operating agreements. The terms of a negotiated agreement will be open to interpretation and to potential opposition from a successor administration. Many emerging countries in which we conduct exploration require that the foreign investor negotiate some form of operating agreement with the host government. The required timing for negotiations may vary. All such countries require that a negotiated agreement will be finalized prior to the licensee commencing development of a mine. Countries like Kazakstan, Ethiopia, Tanzania and Tunisia authorize tSlt is interesting to note that in Kazakstan the original data costs were absorbed by the Government of Russia and not Kazakstan.
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issuance of either a mining license or a 'combined' exploration and mining license. They permit the license holder to negotiate an agreement with the host government upon issuance of the combined license or upon issuance of the mining license. For purposes of strategy and leverage, it is preferable to negotiate those fiscal and operating terms which the investor believes to be essential for an economically viable mining operation as early as possible, and most definitely before making a discovery of a commercial deposit. Acquiring mining rights The Russian system for licensing minerals is based upon a process of competitive tenders. The Kazak system for licensing is somewhat different and allows for both competitive tenders and direct negotiations.~6 In both countries, the government and the license holder will ultimately negotiate a license agreement which will establish the conditions under which exploration and mining activities may be conducted. Both governments allow for three distinct types of licenses: a fixed-term exploration license, a fixed-term mining license, and a 'combined' license for exploration and mining. In both countries, the investor and the government must negotiate an agreement which is separate from and in addition to the 'combined' license. However, the terms of the negotiated agreement must not contradict the license. In Kazakstan the holder of an exploration license will have the first right to obtain a mining license for the license area. In Russia, an exploration license holder will still have to compete in the subsequent competitive tender for the mining license, without any comfort that it will win the tender. This disincentive to invest in high risk exploration may only be overcome if the investor is able to secure a 'combined' license, rather than an exploration license. Because of the high risks associated with exploration and mining, BHP Minerals prefers exploration opportunities in those countries which allow direct application for (or the staking of mining claims which give) the exclusive right to conduct both exploration and mining, countries like Chile, Mexico, Canada, Australia, the US, Ghana, Ethiopia and Tanzania. In those countries which apply competitive tenders, BHP Minerals will seek to mitigate its exposure to risk, when possible, by applying for a combined license. Negotiated license agreement BHP Minerals won the tender for the Zhetigara project and was issued a combined exploration and rain~'~Article 21 of Edict No 2828 (of 27 January 1996), and Section 8.2 of the Kazak Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994). Article 24, Section 1 of Edict No 2828 also allows for open-type tenders and closed-type tenders. Closed-type tenders are those in which the selected participants are invited by the Government to bid. It is a means for the Government to limit competition.
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ing license, in its own name, upon the condition that BHP and the Licensing Body negotiate and enter into a formal Agreement for the Use of the Subsurface ("License Agreement") within 6 months. 17 Failure to negotiate and finalize the License Agreement within the prescribed 6 months would have resulted in the license becoming void. The entire process of making an application, holding the tender, being issued the License and negotiating the License Agreement took 14 months. During that interim and without having any perfected legal rights to minerals, BHP Minerals was strongly encouraged by the local geological department and the Government to show BHP's good faith by spending significant amounts of hard currency for exploration and purchasing of maps. The risk of forfeiture of the license and the expenditures made during the interim created an imbalance in the negotiation process. Today, Article 43, Section 1 of Edict No 2828 provides for utilization of a Model Contract in negotiating such a License Agreement. The Model Contract is, by definition, a rough contract approved by the Government which contains the general provisions to be included in compiling different types of contracts. The Model Contract is modeled after some of these very early License Agreements negotiated with the Government and foreign investors like BHP Minerals. Work programs and guarantees
Countries vary significantly with regard to how they approach work programs and expenditure commitments. It is not unusual for the work plan and budget to become one of the most controversial and negotiated provisions of a license or license agreement. In some countries, like Tanzania, the law provides that the budget for a negotiated work plan is to be considered a debt due to the Government and is recoverable in a court of competent jurisdiction. ~8 In other countries, like Ethiopia, the law authorizes the Government to negotiate minimum work plans and budgets and to require, at its discretion, that the applicant for a license, or the license holder upon a renewal of a license, provide a guarantee to secure performance of all obligationsJ 9 All exploration licenses in Kazakstan must contain a minimum program of work. z° Each entity submitting a competing tender will propose a work program and the schedule of minimum annual expenditures WPrior to BHP Minerals winning its tender, notice of the tender had been published for 2 months with the intention of encouraging other bids. Edict No 2828, Article 25, Section 1 now requires that a tender be published for a period of not less than 90 days prior to the award being made. L~Article 36 (3) of the Tanzanian Mining Act, 1979. 19Article 45 of Mining Proclamation 52/1993. The guarantee will be linked to the work plan and will be based on its estimated budget. The effect of this guarantee is to treat the estimated budget as though it were a debt owed to the Government. 2°Article 32, Section 5 of Edict No 2828.
that it is willing to obligate itself to fulfill during the term of the license. 2~ Failure to fulfill these minimum work expenditures will result in forfeiture of the license. The minimum expenditure levels imposed in both the license and the License Agreement will be the amounts actually proposed in the winning tender. The particulars regarding implementation of the work plan and budget may be negotiated in the License Agreement. Although BHP Minerals was not required to provide the Government of Kazakstan a guarantee under the terms of its License Agreement, it was a matter which was heavily negotiated. Government participation
Mining legislation in many emerging countries, such as Ethiopia, Botswana and Tanzania, authorizes governments to acquire a full equity interest, at no cost to the government, in the mining operations of an investor or in the mining enterprise of the investor. Foreign entities are specifically permitted to seek approval to explore for and exploit mineral resources (including precious metals and stones) in Kazakstan without Government participation, zz In practice however, the foreign investor is often encouraged to identify a local Kazak partner and to negotiate a joint venture agreement with that partner if the foreign investor wants to win a competitive tender. Prior to BHP Minerals' application for a combined license for its Zhetigara project, the common practice was that a foreign investor would first identify a Kazak partner, negotiate and enter into a formal joint venture, establish and register a juridical entity, and afterwards apply for a license in the name of the newly established juridical entity. This process could easily take up to one year to complete before even submitting a tender proposal. After having incurred significant legal costs to establish a juridical entity with a Kazak partner, the newly established entity would have no assurance that it would submit the winning tender proposal. There will also be a public hearing at the time the actual award of the tender is to be made. At one such public hearing, the Kazak partner of a foreign investor actively opposed issuance of the license to the newly established joint venture entity in which it and its foreign partner were shareholders. BHP Minerals elected to take a different approach from that taken by its competitors and made an application for a license in its own name. Kazak entities who were interested in becoming BHP's partner actively opposed our efforts. However, MinGeo was able to override those objections and insist that there 2~Section 8.7 of the Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994). ZZArticle 11, Section 1 of Edict 2828 (of 27 January 1996), and Sections 2.7 and 8.1 of the Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994).
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was no legal reason why the License could not be issued in BHP's name. The License ultimately issued to BHP Minerals and the License Agreement negotiated with the Licensing Body required, however, that BHP eventually establish a joint venture enterprise with Kazak partners before it could commence mineral production. It is conceivable that this requirement may have a detrimental impact on the project's economics and BHP's decision to proceed with development if a commercial ore body is identified. Fiscal and other negotiated terms The License issued to BHP Minerals for the Zhetigara project granted it the exclusive right to use subsurface resources in the license area to conduct geologic studies, prospect for, explore for, develop, mine, extract, process, sell and export gold and its byproducts for a primary term of 25 yr. Edict No 2828, Article 34 modifies Section 6.5 of the Regulation on the Licensing Procedures and now allows an exploration license to be issued for a term of up to 6 yr, while a mining license may be issued for a term up to 25 yr. Combined licenses may be issued for a combined term of up to 31 yr, with possible extensions. Possible extension periods are left to the discretion of the Licensing Authority and should, therefore, be negotiated within the terms of the license agreement. BHP's License Agreement, which was negotiated before passage of Edict No 2828, provides that if BHP Minerals is actively engaged in a geological survey or mining within the license area, then BHP has the right to extend the term of the License for two periods of 25 yr each. BHP Minerals agreed to the proposed work program and schedule of minimum annual expenditures that it submitted in its application for the License. Failure to fulfill annual minimum work expenditures will not result in forfeiture of the License. However, if BHP fails to fulfill the aggregate amount of work expenditures for the first 5 yr, MinGeo has the right to terminate the License (termination does not occur automatically). The Licensing Body and BHP Minerals also established a mutually agreed upon level of historical expenditures incurred for geologic exploration in the license area and the manner in which those expenditures are to be reimbursed to the Government. The historical expenditures would be reimbursed to the Government commencing from the sale of the first refined mined gold on an annual basis, prorated over the projected life of the mine (without discounting or interest). Although the Law on Foreign Investments provides for certain Government guarantees, 23 it is preferable that those guarantees be clarified and expanded upon (provided they do not conflict with existing law). Arti23Law No 266-XIII of the Republic of Kazakstan Concerning Foreign Investments (27 December 1994), Chapter II.
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cle 6 of the Law on Foreign Investments and Article 71 of Edict No 2828 provide for economic stability in the event of a deterioration of the position of a foreign investor which is a result of changes in the legislation or changes in the provisions of international treaties. Edict No 2828 does not, however, address the effect of changes in the law which positively affect a foreign investor. A foreign investor must also be mindful that Article 6 provides that the negotiated agreement may be altered only with the mutual consent of the parties for the purpose of achieving the balance of economic interests. Because BHP Minerals expects to improve its economic position with regard to future legislation, its License Agreement addresses the issue of how BHP would benefit from positive legislative changes. Proprietary rights to geologic data are uncertain under the Kazak law. The procedures for use and confidential protection of geologic information are to be negotiated by the Government and the foreign investor in the License Agreement. 24 The Kazaks do not employ internationally accepted accounting standards. BHP Minerals was able to negotiate in its License Agreement that it would keep bookkeeping accounts in accordance with both the laws of Kazakstan and in accordance with the laws which are current in the country of the origin of BHP Minerals, or those adopted by the international practice. Major fiscal terms which we were able to negotiate in our License Agreement include the following: (at a signing bonus of zero, because the License was granted on risk terms; (b) a commercial discovery bonus of 2% of capital expenditures projected in the feasibility study (this bonus payment is to be made only after BHP receives all required authorizations to commence mining); (c) a production bonus of zero; (d) a sliding scale royalty ranging from 0 to 3%, as determined by BHP's internal rate of return; (e) an excess profits tax determined by BHP's internal rate of return; (f) the right to amortize equipment upon negotiated terms; and (g) assets imported by BHP Minerals, as well as the personal property of its foreign personnel, are to be free of import customs duties and excise. Tranaferability There is no provision under Russian law or regulation permitting a license to be transferred from the license holder to another entity. Mineral licenses stipulate that the license may not be transferred to a third party nor offered as security to a lender. In Russia, an 2~Article 69 of Edict No 2828.
Mining in Kazakstan: M J Neumann attempted assignment to an entity with foreign investment will trigger a new competitive bid. The Kazak law, which used to mirror the Russian law, has been modified by Edict No 2828. Article 14 of the Edict now allows conveyance by the license holder to any other entity upon obtaining permission from the Licensing Body. The license holder may now transfer the license or its right under the license to an affiliated company or subsidiary without the need to obtain such permission. Article 15 of the Edict now permits pledging the rights of the license holder to a financial lender. Because Edict No 2828 was approved following the negotiation of B H P ' s License Agreement, these were conditions which BHP had to negotiate into its License Agreement. BHP Minerals requires the right to transfer mineral licenses to third parties and will be reluctant to operate in a legal environment in which it is not able to freely transfer and encumber its mineral interests. A mineral license is a valuable property. The right of the investor to encumber and ultimately assign its interest in the license is essential to its ability to raise funds using the mine assets and mine production as collateral. If a license holder discovers a commercial deposit in which it has no strategic interest, it must be able to sell its mineral rights and recover the value it has added to the project. A license holder may desire to share risks and rewards with a joint venture partner. Those partners may desire to establish a joint stock company to which the license will be transferred. Investors can only operate successfully within legal systems allowing them to transfer their mineral rights and all other commercial rights. The recent changes in the Kazak mining law reflect these commercial realities.
Fundamentals of a successful negotiation BHP Minerals' contracts must be structured so that it places no more at risk and spend no more than is justified until a project warrants the exposure, the risks are understood, and BHP is able to mitigate identified risks. BHP Minerals' objective is to negotiate and structure its contracts in a manner designed to protect any value it adds to a project. Credibility The key to structuring a successful transaction in one of the countries of the former Soviet Union is relational. A foreign investor must establish trust and maintain credibility. This is easier said than done. The Soviet system of government and commerce was, and to a large degree remains, secretive and suspicious of the ways of the West. Western business concepts are not fully understood by the Russians or the Kazaks. To establish credibility, contracts in Kazakstan must be unambiguous and clearly explain how that
relationship will work. A foreign c o m p a n y ' s expectations must be clearly explained to avoid the appearance of making promises which are not kept. A foreign company must also understand the expectations of the Government. The transaction should be completely transparent. Recognition of problem areas All contracts in Kazakstan must recognize that there is a lack of effective institutions and legal precedent for enforcing property rights. The preference of BHP Minerals is for its contracts to provide for international arbitration. 2s The Kazaks, like the Russians and governments of other emerging countries, do not employ internationally accepted accounting standards. Our contracts must try to address convertibility of currency and payment of taxes. We must also anticipate the need for central bank approvals as well as other types of approvals which may become critical over time. Maintaining a continued presence Experience has taught BHP Minerals that the consequence of maintaining a sporadic presence in a host country will be to suggest to the governmental parties with whom we are negotiating that our intentions are not serious, with the inevitable result that neither our negotiations nor our projects progress in our absence. Although a foreign investor may not be able to justify opening and staffing an office or registering a branch in the foreign country until it has secured a mineral license under which it can operate, its personnel should manage systematic and frequent trips to negotiate, gather information, and make contacts. 'Out of site, out of mind' is an appropriate way to describe the attitude of various governmental agencies toward the many foreign mining companies expressing an interest in doing business in Kazakstan. Nothing material moves forward in the absence of the investor. BHP Minerals took advantage of Austrade 26, law firms, consultants, and other identified resources within Kazakstan to make its presence more consistent. Facilitators One method for establishing a continuing presence in a host country is to identify a local facilitator. Identifying a local facilitator also assists a foreign investor in finalizing a successful negotiation. A facilitator will have a thorough understanding of the political and legal framework within which a foreign investor must operate and of the individuals with whom which an investor must negotiate. A good facilitator attempts to move negotiations forward in the absence of the 25Article 27 of the Kazak Law on Foreign Investmentspermits resolution of disputes by international arbitration. 26Austrade is a trade organization which promotes foreign trade with Australian enterprises.
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investor. A good facilitator assists the investor to identify and resolve jurisdictional conflicts and overcome gaps in the existing regulatory process. Local legal counsel may also be adept at serving as a local facilitator. BHP Minerals has engaged the services of legal counsel in Kazakstan and other countries, such as Ethiopia and Tunisia, who have proven to be capable facilitators.
Other elements of a successful negotiation Other elements to a successful negotiation include the following:
may
• choose a partner carefully (conduct due diligence to determine who your partner is, who the shareholders are, identify the decision makers, make sure that your partner is privatized before you develop a project or you might have to start the negotiation process over with the new shareholders); • be aware that partners sometimes disappear (Since BHP first initiated activities in Kazakstan, numerous semi-governmental entities with whom we negotiated contracts, such as Marzhan, have disappeared. This aspect of a fluid political and economic environment must be considered in identifying and choosing local partners); • assess the commercial risk of the project; and • treat your partner with respect.
The negotiation process was complex and the legal system is not well established. Establishing successful contracts and relationships requires great flexibility, patience, and hard work. BHP Minerals first had to understand the parties with whom it was negotiating and their expectations. Simultaneously, we had to educate them to understand us and our expectations. Clarity and transparency were keynote to establishing B H P ' s mining venture in Kazakstan. Political and legal changes in Kazakstan have created a dynamic and fluid environment in which we have had to continue to identify new and creative ways in which to operate after our mining venture was established. The matters discussed in this paper are just the more obvious legal issues which had to be addressed early in the process in order to establish our venture in Kazakstan. Our project geologists continue to experience an accelerated learning curve. They must find new and effective ways to work with their local counterparts, negotiate vendor contracts, and anticipate future problems. This paper did not discuss such operating issues. One such issue arises from the Foreign Corrupt Practices Act, 27 which has a significant influence on how our geologists may interact with local officials. Having established our mining venture, we must now continue our efforts to maintain that venture if we are to claim that we have achieved a successful mining venture in Kazakstan.
Summary There was no simple formula for BHP Minerals to establish a successful mining venture in Kazakstan.
2715 USCA §78dd-2.
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Resources Policy. Vol. 23, No. 3, pp. 137-146. 1997
Pergamon
PII: S0301-4207(97)00022-6
© 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0301-4207/97 $17.00 + 0.00
A company perspective on doing business in the former Soviet Union: a mining venture in Kazakstan Michael J Neumann Senior Counsel, BHP Minerals, Legal and Land Department, 550 California Street, San Francisco, CA 94104-1020, USA
BHP Minerals recently applied for and received a license to conduct exploration and mining of gold covering an area of in excess of 2.5 million acres in Kazakstan. The license required that BHP negotiate an agreement with the Government. The agreement had to clarify the conditions for conducting operations, augment existing laws and regulations, and address fiscal and other terms which would impact the commerical viability of any potential discovery. This paper reviews the complex acquisition and negotiation process from the perspective of a foreign investor conducting exploration activites in emerging countries which are moving from a c o m m a n d economy to a market driven economy. © 1997 Elsevier Science Ltd. All rights reserved
Introduction
This paper reviews BHP Minerals' t efforts to acquire exclusive exploration and mining rights in Kazakstan. BHP's experience is reviewed in the context of emerging countries that are moving from command to market economies and are modifying existing mining codes or adopting new mining codes to attract foreign investment. BHP Minerals made an application to The Ministry of Geology and the Protection of the Subsurface of the Republic of Kazakstan ('MinGeo') for an exclusive 25 yr combined exploration and mining license on 24 June 1994, "under risk conditions ''2 to use the sub~BHP Minerals is a business group of The Broken Hill Proprietary Company Limited (ACN 004 028 077), Australia's largest industrial and natural resources company. BHP conducts exploration and mining throughout the world. 2The Kazaks use the term "under risk conditions" to refer to the fact that there is no known mineral deposit and that all exploration investments are made under the risk that a discovery of valuable minerals will not be made. Because the risks are unknown, the investor should be able to negotiate more favorable terms in the negotiated License Agreement. Securing this 'risk' status is itself
surface for exploration and mining of gold in the area surrounding Zhetigara in the Kostanai Oblast. The project area consists of 2 640 950 acres in the north central part of Kazakstan, on the Russian border. Competitive bids were invited and BHP Minerals won the tender. The license was issued in February 1995, on the condition that BHP and the Government negotiate and enter into a formal Agreement for the Use of the Subsurface ('License Agreement') before 14 August 1995. This was the first License Agreement for hard rock minerals to be negotiated between the Licensing Body 3 and a foreign investor. The negotiation process for BHP Minerals was complicated because Kazakstan was just emerging from a Soviet style command economy and the governing rules were embryonic. Many of the Kazaks with whom we had to negotiate, like their Russian a matter to be negotiated with the Kazaks (at the stage of making the application for a license). 3The Government was represented by the Licensing Body, which was formed under Resolution No 7-73R, dated 18 July 1995, by the First Deputy Prime Minister of the Republic of Kazakstan.
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Mining in Kazakstan: M J Neumann counterparts, had only a superficial understanding of the way business is conducted in the West. Consequently, the negotiation process was prolonged to allow each party to educate the other party as to their mutual expectations and to identify the most appropriate resolution for perceived differences in how to conduct business. Although Kazakstan offers foreign investors a fairly transparent legal regime for securing exclusive mineral rights, there remain ambiguities and omissions in the tax and investment laws which must be resolved through negotiation of a formal agreement with the Government before investors will want to proceed with development of a mining project. There also exist bureaucratic obstacles which investors must anticipate and circumnavigate in the negotiation process. These are matters which BHP was able to successfully address and are discussed in this paper.
Investment climate Before investing time, money and effort initiating an exploration project or acquiring an interest in a mineral deposit in any foreign country, BHP Minerals first evaluates: (i) the potential for finding a valuable mineral deposit; (ii) the ability to mine the deposit if one is located; (iii) the ability to sell the processed mineral at a profit in the world markets; and (iv) the ability to manage risk. Once this preliminary evaluation has been completed, BHP then compares and prioritizes its investment opportunities located throughout the world.
Comparing legal and fiscal regimes In comparing projects, BHP Minerals not only evaluates the geologic merits of each project, but also evaluates the legal process under which it may secure an exclusive right to explore for and mine a mineral deposit. BHP Minerals targets legal systems that are both transparent and grant secure and exclusive legal rights to explore for and mine minerals. A legal system that allows discretionary government approvals or unilateral government revisions of an operating agreement will deter our investment in that country. The governments of the former Soviet Union and other emerging nations are continuing to modify or replace their mining and investment laws to compete for and encourage foreign investment. The following is a synopsis of what we found in Kazakstan compared with Russia. The Government of Kazakstan recently adopted a more transparent legal regime that allows a foreign investor to establish and secure, by registration, mineral rights. 4 Article 11, Section 1 of Edict No 2828
4This is evidenced by passage on 27 January 1996, of Edict No 2828 Concerning the Subsurface and its Utilization, which replaces the Code of the Republic of Kazakstan on the Subsurface and Processing of Raw Minerals of 30 May 1992.
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confirms that foreign persons and foreign legal entities, including foreign states and international organizations, shall have the same right to use the subsurface as citizens and legal entities of Kazakstan. 5 Notwithstanding that a country's legal regime may be transparent, the tax regime or fiscal terms of negotiated agreements may prove to be a deterrent to investments. Both Kazakstan and Russia require foreign investors to negotiate a signing bonus, a commercial discovery bonus, and a production bonus in addition to other very significant mineral holding costs. Additionally, both countries require that license holders reimburse the government for historical expenditures incurred by the government in conducting exploration within the license area. Kazakstan permits royalty rates to be negotiated and the Government may seek to negotiate an excess profits tax in addition to the profits tax of 30%. Russia does not permit negotiation of the royalty rate, although proposed production sharing legislation would permit such rates (and tax rates) to be negotiated. After several attempts, however, the Russian government has failed to adopt production sharing legislation. Both countries impose a value added tax. Unless these prohibitive fiscal terms are negotiated to more commercially acceptable levels, only an exceptionally robust exploration project would be considered for development in either Russia or Kazakstan.
Ability to market production A foreign investor, like BHP Minerals, must assess whether it will be able to freely export minerals which it mines and sell them at world prices to realize a reasonable return on its investment. In today's market economy, all mining projects are high risk investments and demand a long term investment strategy. An investor must be able to ascertain all conditions that influence a project's ability to recoup its investment and earn a return on the investment commensurate with the risk. International mineral investors operate in a global market and must be able to quickly adapt their operations in response to prevailing market conditions. They require the freedom to mine minerals at production levels supported by world markets, rather than by quotas established by governments, and the freedom to sell their mineral product in international markets at international prices and for hard currency. The former Soviet Union was a command economy requiring mine producers to sell their required quota 5Although Edict No 2828 does not require that the foreign investor register a representative office or a branch, nor establish a local legal entity (either through incorporation of a new company or by incorporating a formal joint venture entity), the Government did require under the terms of BHP Minerals' License Agreement that BHP register a branch following registration of the License Agreement.
Mining in Kazakstan: M J Neumann
of production to the Soviet government at prescribed prices. It was a rigid and inflexible economy run by and for the government. A mining operator had no contact with world markets and was required to achieve production levels prescribed by a state expert on reserves. These production quotas were not determined by market or operating conditions. Although many attributes of a command economy continue to linger in both Russia and Kazakstan, such attributes appear to be disappearing more quickly in Kazakstan. In attempting to liberate its economy from being a command driven economy, Kazakstan has adopted the Foreign Investment Law and the Decree "On State Regulation of Relationships Involving Precious Metals and Precious Stones" (the 'Decree'). The Decree went into effect 22 July 1995, and provides for the export of gold and other precious metals by foreign investors and domestic entities with foreign participation. The Decree provides producers the right to export ore for the purpose of refining. For the first time, Kazak law provides foreign investors the opportunity to export precious metals produced in Kazakstan. Although the Decree represents a decisive step toward establishing the legal framework for foreign investment in the Kazak precious-metals sector, Edict No 2828 (adopted on 27 January 1996, replacing the 1992 mining code) moves Kazakstan in the opposite direction and perhaps contradicts the intention of the Decree. Article 67 of the Edict provides that the Government has the pre-emptive right to purchase all useful minerals out of the share of the foreign investor at prices which do not exceed the market prices in the international market. The maximum volume that may be so purchased by the Government and the specific terms of this pre-emptive right must be negotiated in the license agreement. Another matter for foreign investors to consider is the ability to physically transport mineral production beyond the borders of Kazakstan. Kazakstan, like many other countries within the former Soviet Union, is landlocked. Russia has the ability to deny Kazakstan production access to international markets. This ability is far weaker with regard to precious metals and stones than is the case for bulk mineral commodities such as oil, gas, pig iron and copper, which are more difficult to transport. David Horley, of the European Bank for Reconstruction and Development, was quoted as saying "The beauty of precious metals is that you load the ore on a plane and wave at the Russians as you fly over their c o u n t r y " . 6
Managing risks Ideally, risk mitigation requires that an investor: (i) properly evaluate all risks (both on a country basis and on a project basis); (ii) insure what risks it is able 6The National Law Journal, 4 December 1995.
to insure; (iii) prepare a risk management plan; (iv) develop a funding strategy for each project from an early stage; and (v) develop a decisive exit strategy. One approach BHP Minerals attempts to employ for managing risks in a country perceived to be a high risk country is to advance the exploration project in stages, with each stage being identified by a higher level of investor commitment to both the project and the country. If at any stage the decision is made to withdraw, BHP does its best to have a clearly defined exit strategy. Exit strategy The exit strategy is, in large measure, contingent upon whether BHP Minerals desires to tactically withdraw from the project and/or country, or to protect and benefit from any value it has added to the project. A successful exit strategy depends on our ability to transfer our mineral rights in the project to a third party and to limit our legal obligations. Our recent experience in Mongolia, which has been influenced by Russia and is in many ways similar to Kazakstan, has focused our attention on specific problems that could arise from an attempted tactical withdrawal from a joint venture agreement. Article 17 of the Foreign Investment Law of Mongolia provides that the winding up or dissolution of a joint venture with foreign investment requires a resolution approved by all of the parties to the joint venture to terminate both operations and the joint venture. The joint resolution must by submitted to the Ministry of Trade and Industry. Only after proper verification that all liabilities and obligations of the joint venture have been fulfilled will the Minister authorize dissolution of the joint venture with foreign investment. The effect of Article 17 is that one party to a joint venture cannot unilaterally withdraw from or terminate the joint venture, regardless of whether the other party is in material breach of the joint venture agreement. A foreign investor must recognize that dissolution of a joint venture may be viewed by the local partner as having negative political perceptions within the government. If that is the case, then the local partner, like BHP's local partner, may be unwilling to terminate the joint venture. Because the ability to terminate a more formal relationship with a local partner in a country like Mongolia, Russia, or Kazakstan might prove to be difficult in law and in practice, it may be preferable to enter into a binding, but less formal Heads of Agreement, Memorandum of Understanding, or Protocol with that partner. 7 Each of these countries recognizes simple partnerships and contractual rights. All of the key commercial terms would be agreed 7This is assuming that the foreign investor will have a local partner. BHP Minerals was required, under the conditions of its License Agreement, to establish a joint venture with local Kazak entities. This type of circumstance is discussed further under the topic "Government Participation".
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upon and the parties would defer entering into the more formal joint venture agreement (and establishing the legal joint venture enterprise) until such time that there is a geologic, legal, or other justification for establishing the more formal legal relationship between the parties. An additional consideration in defining an appropriate exit strategy is to determine whether, upon early withdrawal or termination, work commitments are considered a debt in the host country or whether the host country will require a performance guarantee. Exploration licenses in Kazakstan may have primary terms of 6 yr 8 and require a work programme and agreed upon level of minimum expenditures over the full term of the license. Although Edict No 2828 does not require a performance guarantee, nor does it stipulate that the minimum work commitment is to be considered a debt owed to the Government, it is very likely that the Licensing Body will negotiate a form of guarantee in the license agreement. It is, therefore, preferred to negotiate more rational expenditure levels over the full term of the license, or, alternatively, to mutually agree that such work obligations are to be fulfilled on the basis of the type of work to be performed (rather than on the basis of the level of expenditures). In defining an appropriate exit strategy, BHP Minerals also determines whether its mineral rights will be transferable and what type of restrictions may apply to such a transfer. In many countries prospecting and exploration licenses may not be transferred, or may be transferred only with the prior approval of the host government. Edict No 2828 has made significant progress in expanding the right of a foreign license holder to transfer its rights and obligations under a license. Article 14 permits a license holder to convey to a subsidiary company without requiring permission from the Government and a license holder may convey to any other entity with permission from the Licensing Body. Developing an appropriate exit strategy requires that a foreign investor understand and anticipate its ability to withdraw from and terminate a joint venture, identify what its continuing liabilities will be, and determine its ability to transfer its interest in the license to a third party. A foreign investor must identify appropriate methods to protect and benefit from any value it has added to a project.
Bureaucratic obstacles Access to the right party In some countries, a foreign investor may not be permitted direct access to various departments with which it desires to meet until it has first met with the representative from an agency whose primary
SArticle 34, Section 1 of Edict No 2828.
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responsibility is to monitor and interface with foreign investors. This filtering of contacts and negotiations creates inefficiencies and problems for foreign investors. Prior to 1995, in Kazakstan there existed a close political alliance between the National Agency for Foreign Investment under the Ministry of Economics (the 'Agency') and the Kazakstan Research Institute ('Kaznedra'). At that time, BHP Minerals could not make direct contact with various governmental departments without first obtaining the permission of and introduction from the Agency. Our geologists were initially misdirected by the Agency and instructed to negotiate a joint venture agreement with Kaznedra, although Kaznedra had no legal rights to geologic data nor to minerals within the area our geologists were interested. Failure to negotiate with Kaznedra resulted in the Agency denying our geologists access to the subject area.
Jurisdictional conflicts Prior to the Kazak Government privatizing various governmental functions and inviting foreign investors to participate in or assume those functions, all exploration activities were undertaken and administered by The Ministry of Geology and the Protection of the Subsurface of the Republic of Kazakstan ('MinGeo') through local geological departments. All mining of precious metals and stones was undertaken exclusively through the state chartered National Joint Stock Company Altynalmas ('Altynalmas') 9 or its local mining enterprise. All gold and precious metals produced from mining were sold to the National Bank of Kazakstan at prescribed prices. Altynalmas was and remains under the authority the Minister of Industry and Trade of the Republic of Kazakstan ('Minpromtorg').l° There was no apparent conflict between MinGeo and Minpromtorg because both functioned as mere extensions of the Kazak Government. The Government was the explorer, the miner, and the owner of the product. The Kazak Government no longer subsidizes exploration and now allows other mining enterprises to compete with Altynalmas. MinGeo and Minpromtorg encourage their previously subsidized local departments and mining enterprises to seek foreign partners to fund their projects. Consequently, these various local departments and mining enterprises may make competing and conflicting claims to the same project area, especially the more attractive areas. During the initial stages of privatization, jurisdictional conflicts were amplified in the licensing process because all exploration licenses were issued by Min9Altynalmas has lost its national charter and is now a joint stock company, thereby losing its exclusive right to mine precious metals and stones. "~Having been authorized by the Decree of the Cabinet of Ministers of the Republic of Kazakhstan No 882 dated 27 June 1995.
Mining in Kazakstan: M J Neumann Geo while all mining licenses and combined licenses were issued by Minpromtorg. A n u m b e r o f Kazak governmental bodies were and are assigned various roles in relation to exploitation o f mineral resources. Unfortunately, their roles are rather poorly defined, which leads to jurisdictional conflicts. The G o v e r n m e n t has taken significant steps to address the major jurisdictional conflicts between M i n G e o and Minpromtorg through recently enacted legislation.~ t Under authority of this legislation: • the Cabinet o f Ministers is authorized to establish procedures for the exploration and development o f natural resources; • M i n G e o is now authorized to issue all mineral licenses, including exploration licenses, mining licenses, and combined licenses; • a Licensing Body, representing the full Cabinet o f Ministers, has been delegated the authority on behalf o f the Cabinet o f Ministers to negotiate all License Agreements between the licensee and the Government; and • Minpromtorg is authorized to execute all License Agreements on behalf o f the Government. The consequence o f minimizing such jurisdictional conflicts in Kazakstan has been to establish a more rational, transparent and orderly environment for foreign investment. B H P Minerals was able to finalize a license agreement with the Government, initiate and carry through an exploration program, and subsequently enter into separate contracts with both Altynalmas and the local exploration department of MinGeo. Multiple uses Minimizing the potential for conflicting uses is an attractive inducement for any exploration project in a competitive environment. Because emerging countries have an urgent desire to develop mines and exploit minerals to stimulate their economies, this is one aspect o f mining law reform which receives very little attention from the perspective o f the investor. In contrast to Tunisia, where minerals are classified and licenses are issued for mineral ' g r o u p s ' and multiple permits m a y not be issued for discrete minerals included within the same ' g r o u p ' of minerals and fall-
~Edict No 2828 Concerning the Subsurface and its Utilization; the Decree of the President of the Republic of Kazakstan 'On Additional Measures for More Orderly Use of the Subsurface for Geologic Exploration and Mining of Subsurface Resources' (5 April 1994; No 1637); the Resolution of the Cabinet of Ministers of the Republic of Kazakstan "On Procedures for Providing the Subsurface for Geologic Exploration. Mining of Subsurface Resources and Use for Other Purposes" (13 April 1994; No 377); the Regulation on Procedures for Licensing the Use of the Subsurface in the Republic of Kazakstan, approved by Resolution No 886 (8 August 1994) of the Cabinet of Ministers of the Republic of Kazakstan; and the Decree of the Cabinet of Ministers (No 882, 27 June 1995).
ing within c o m m o n boundaries, ~2 Kazakstan does not classify minerals by groups and multiple licenses may be issued for discrete minerals located within the same boundaries. ~3 There exists a significant risk in Kazakstan that conflicting uses will arise within a license area. Attempting to minimize the potential for such conflicts, B H P Minerals actively participated in and assisted M i n G e o during the tender process. W e attempted to provide for a more comprehensive definition o f minerals for our Zhetigara project. ~4 H o w ever, M i n G e o was not prepared, at that time, to allow more than one mineral to be made the subject of a license. W e were subsequently able to expand the definition of minerals in our License Agreement to include gold and all 'byproducts'. Federal vs Local jurisdictional conflicts Allocation of rights to exploit major mineral deposits is usually controlled by the federal or state government, while rights to minor deposits are usually controlled by regional or local governments. In Kazakstan there is no tax imposed upon foreign investors by the local administrations. Local administrations in Kazakstan do, however, negotiate rental payments for surface land use (these payments, which m a y be substantial, are intended to support the social infrastructure within their region). There does not appear to be any significant overlap between the Kazak federal government and the local governments with regard to either the licensing of minerals or imposition of taxes. Before B H P Minerals proceeded with its exploration project in Kazakstan, it wanted to determine that such conflicts did not exist and then identify what agreements would need to be negotiated with the local administrations and when those agreements should most timely be negotiated. Acquiring data An obvious way to induce serious foreign investors to consider exploration and development opportunities and to participate in tenders is to make available to them as much geologic data and maps as possible for little or no cost. In practice, however, this has proven to be most difficult in Russia and other countries of the former Soviet Union. All geologic data and information is ' o w n e d ' by the G o v e r n m e n t in Russia. While a c o m m o n geologic data package will be provided to all participants o f a
~2Article 5 of The Decree on Mines provides that an exploration permit and mining concession shall be issued for all minerals falling within the same 'group'. Article 1.3 provides that Group 3 minerals include all metallic substances, such as bauxite, silver rare metals, chromium, copper, iron, tin, nickel, gold, lead, zinc, etc. ~3Article 35, Section 1 of Edict No 2828. ~4pursuant to Article 7, Section 4, MinGeo has authority to define the list of minerals to be made the subject of a tender. Article 7 also provides the basis of MinGeo in establishing all other conditions of the tender.
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Mining in Kazakstan: M J Neumann tender for a prescribed price, detailed geologic data will only be provided to the winner of the tender. In Russia detailed geologic data is considered to be a 'secret' and is restricted to license holders, thus preventing potential investors access to meaningful data to assess the merits of an investment. Most importantly, the export of data from Russia is restricted and disclosure to foreign parties amounts to an 'export' of data. A foreign investor must find creative ways, usually by contract, to overcome these secrecy restrictions. The Kazaks have attempted to address the type of problems found in Russia associated with acquiring geologic data. The Kazaks permit data to be acquired through a negotiated purchase from MinGeo, whether or not the purchaser is the license holder and whether or not there is a tender. In addition to this negotiated price, both the Kazaks and the Russians still charge the license holder for all historical costs incurred by the Government's geological departments in generating all maps and data within the license area. ~5 These costs are to be paid as a charge against future mining revenue generated from within the license area. These costs can be substantial and will most likely be a matter of significant negotiation in any subsequent license agreement between an investor and the Government.
Negotiations with the Government General overview As an international investor, it is B H P ' s preference that operating and fiscal terms be clearly defined within the context of the mining code and existing legislation of the host country rather than to have those terms negotiated with the host government. If negotiated terms differ from or contradict existing legislation, then the negotiated agreement must be established as a normative act; the agreement must be enacted as a law. This process is costly, time consuming, and inefficient both for the investor and the host government. Such a negotiated agreement would be difficult for the government to administer because each agreement would be unique and require administration separate from all other operating agreements. The terms of a negotiated agreement will be open to interpretation and to potential opposition from a successor administration. Many emerging countries in which we conduct exploration require that the foreign investor negotiate some form of operating agreement with the host government. The required timing for negotiations may vary. All such countries require that a negotiated agreement will be finalized prior to the licensee commencing development of a mine. Countries like Kazakstan, Ethiopia, Tanzania and Tunisia authorize tSlt is interesting to note that in Kazakstan the original data costs were absorbed by the Government of Russia and not Kazakstan.
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issuance of either a mining license or a 'combined' exploration and mining license. They permit the license holder to negotiate an agreement with the host government upon issuance of the combined license or upon issuance of the mining license. For purposes of strategy and leverage, it is preferable to negotiate those fiscal and operating terms which the investor believes to be essential for an economically viable mining operation as early as possible, and most definitely before making a discovery of a commercial deposit. Acquiring mining rights The Russian system for licensing minerals is based upon a process of competitive tenders. The Kazak system for licensing is somewhat different and allows for both competitive tenders and direct negotiations.~6 In both countries, the government and the license holder will ultimately negotiate a license agreement which will establish the conditions under which exploration and mining activities may be conducted. Both governments allow for three distinct types of licenses: a fixed-term exploration license, a fixed-term mining license, and a 'combined' license for exploration and mining. In both countries, the investor and the government must negotiate an agreement which is separate from and in addition to the 'combined' license. However, the terms of the negotiated agreement must not contradict the license. In Kazakstan the holder of an exploration license will have the first right to obtain a mining license for the license area. In Russia, an exploration license holder will still have to compete in the subsequent competitive tender for the mining license, without any comfort that it will win the tender. This disincentive to invest in high risk exploration may only be overcome if the investor is able to secure a 'combined' license, rather than an exploration license. Because of the high risks associated with exploration and mining, BHP Minerals prefers exploration opportunities in those countries which allow direct application for (or the staking of mining claims which give) the exclusive right to conduct both exploration and mining, countries like Chile, Mexico, Canada, Australia, the US, Ghana, Ethiopia and Tanzania. In those countries which apply competitive tenders, BHP Minerals will seek to mitigate its exposure to risk, when possible, by applying for a combined license. Negotiated license agreement BHP Minerals won the tender for the Zhetigara project and was issued a combined exploration and rain~'~Article 21 of Edict No 2828 (of 27 January 1996), and Section 8.2 of the Kazak Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994). Article 24, Section 1 of Edict No 2828 also allows for open-type tenders and closed-type tenders. Closed-type tenders are those in which the selected participants are invited by the Government to bid. It is a means for the Government to limit competition.
Mining in Kazakstan: M J Neumann
ing license, in its own name, upon the condition that BHP and the Licensing Body negotiate and enter into a formal Agreement for the Use of the Subsurface ("License Agreement") within 6 months. 17 Failure to negotiate and finalize the License Agreement within the prescribed 6 months would have resulted in the license becoming void. The entire process of making an application, holding the tender, being issued the License and negotiating the License Agreement took 14 months. During that interim and without having any perfected legal rights to minerals, BHP Minerals was strongly encouraged by the local geological department and the Government to show BHP's good faith by spending significant amounts of hard currency for exploration and purchasing of maps. The risk of forfeiture of the license and the expenditures made during the interim created an imbalance in the negotiation process. Today, Article 43, Section 1 of Edict No 2828 provides for utilization of a Model Contract in negotiating such a License Agreement. The Model Contract is, by definition, a rough contract approved by the Government which contains the general provisions to be included in compiling different types of contracts. The Model Contract is modeled after some of these very early License Agreements negotiated with the Government and foreign investors like BHP Minerals. Work programs and guarantees
Countries vary significantly with regard to how they approach work programs and expenditure commitments. It is not unusual for the work plan and budget to become one of the most controversial and negotiated provisions of a license or license agreement. In some countries, like Tanzania, the law provides that the budget for a negotiated work plan is to be considered a debt due to the Government and is recoverable in a court of competent jurisdiction. ~8 In other countries, like Ethiopia, the law authorizes the Government to negotiate minimum work plans and budgets and to require, at its discretion, that the applicant for a license, or the license holder upon a renewal of a license, provide a guarantee to secure performance of all obligationsJ 9 All exploration licenses in Kazakstan must contain a minimum program of work. z° Each entity submitting a competing tender will propose a work program and the schedule of minimum annual expenditures WPrior to BHP Minerals winning its tender, notice of the tender had been published for 2 months with the intention of encouraging other bids. Edict No 2828, Article 25, Section 1 now requires that a tender be published for a period of not less than 90 days prior to the award being made. L~Article 36 (3) of the Tanzanian Mining Act, 1979. 19Article 45 of Mining Proclamation 52/1993. The guarantee will be linked to the work plan and will be based on its estimated budget. The effect of this guarantee is to treat the estimated budget as though it were a debt owed to the Government. 2°Article 32, Section 5 of Edict No 2828.
that it is willing to obligate itself to fulfill during the term of the license. 2~ Failure to fulfill these minimum work expenditures will result in forfeiture of the license. The minimum expenditure levels imposed in both the license and the License Agreement will be the amounts actually proposed in the winning tender. The particulars regarding implementation of the work plan and budget may be negotiated in the License Agreement. Although BHP Minerals was not required to provide the Government of Kazakstan a guarantee under the terms of its License Agreement, it was a matter which was heavily negotiated. Government participation
Mining legislation in many emerging countries, such as Ethiopia, Botswana and Tanzania, authorizes governments to acquire a full equity interest, at no cost to the government, in the mining operations of an investor or in the mining enterprise of the investor. Foreign entities are specifically permitted to seek approval to explore for and exploit mineral resources (including precious metals and stones) in Kazakstan without Government participation, zz In practice however, the foreign investor is often encouraged to identify a local Kazak partner and to negotiate a joint venture agreement with that partner if the foreign investor wants to win a competitive tender. Prior to BHP Minerals' application for a combined license for its Zhetigara project, the common practice was that a foreign investor would first identify a Kazak partner, negotiate and enter into a formal joint venture, establish and register a juridical entity, and afterwards apply for a license in the name of the newly established juridical entity. This process could easily take up to one year to complete before even submitting a tender proposal. After having incurred significant legal costs to establish a juridical entity with a Kazak partner, the newly established entity would have no assurance that it would submit the winning tender proposal. There will also be a public hearing at the time the actual award of the tender is to be made. At one such public hearing, the Kazak partner of a foreign investor actively opposed issuance of the license to the newly established joint venture entity in which it and its foreign partner were shareholders. BHP Minerals elected to take a different approach from that taken by its competitors and made an application for a license in its own name. Kazak entities who were interested in becoming BHP's partner actively opposed our efforts. However, MinGeo was able to override those objections and insist that there 2~Section 8.7 of the Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994). ZZArticle 11, Section 1 of Edict 2828 (of 27 January 1996), and Sections 2.7 and 8.1 of the Regulation on the Licensing Procedures approved by Decree of the Cabinet of Ministers (No 886, 8 August 1994).
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was no legal reason why the License could not be issued in BHP's name. The License ultimately issued to BHP Minerals and the License Agreement negotiated with the Licensing Body required, however, that BHP eventually establish a joint venture enterprise with Kazak partners before it could commence mineral production. It is conceivable that this requirement may have a detrimental impact on the project's economics and BHP's decision to proceed with development if a commercial ore body is identified. Fiscal and other negotiated terms The License issued to BHP Minerals for the Zhetigara project granted it the exclusive right to use subsurface resources in the license area to conduct geologic studies, prospect for, explore for, develop, mine, extract, process, sell and export gold and its byproducts for a primary term of 25 yr. Edict No 2828, Article 34 modifies Section 6.5 of the Regulation on the Licensing Procedures and now allows an exploration license to be issued for a term of up to 6 yr, while a mining license may be issued for a term up to 25 yr. Combined licenses may be issued for a combined term of up to 31 yr, with possible extensions. Possible extension periods are left to the discretion of the Licensing Authority and should, therefore, be negotiated within the terms of the license agreement. BHP's License Agreement, which was negotiated before passage of Edict No 2828, provides that if BHP Minerals is actively engaged in a geological survey or mining within the license area, then BHP has the right to extend the term of the License for two periods of 25 yr each. BHP Minerals agreed to the proposed work program and schedule of minimum annual expenditures that it submitted in its application for the License. Failure to fulfill annual minimum work expenditures will not result in forfeiture of the License. However, if BHP fails to fulfill the aggregate amount of work expenditures for the first 5 yr, MinGeo has the right to terminate the License (termination does not occur automatically). The Licensing Body and BHP Minerals also established a mutually agreed upon level of historical expenditures incurred for geologic exploration in the license area and the manner in which those expenditures are to be reimbursed to the Government. The historical expenditures would be reimbursed to the Government commencing from the sale of the first refined mined gold on an annual basis, prorated over the projected life of the mine (without discounting or interest). Although the Law on Foreign Investments provides for certain Government guarantees, 23 it is preferable that those guarantees be clarified and expanded upon (provided they do not conflict with existing law). Arti23Law No 266-XIII of the Republic of Kazakstan Concerning Foreign Investments (27 December 1994), Chapter II.
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cle 6 of the Law on Foreign Investments and Article 71 of Edict No 2828 provide for economic stability in the event of a deterioration of the position of a foreign investor which is a result of changes in the legislation or changes in the provisions of international treaties. Edict No 2828 does not, however, address the effect of changes in the law which positively affect a foreign investor. A foreign investor must also be mindful that Article 6 provides that the negotiated agreement may be altered only with the mutual consent of the parties for the purpose of achieving the balance of economic interests. Because BHP Minerals expects to improve its economic position with regard to future legislation, its License Agreement addresses the issue of how BHP would benefit from positive legislative changes. Proprietary rights to geologic data are uncertain under the Kazak law. The procedures for use and confidential protection of geologic information are to be negotiated by the Government and the foreign investor in the License Agreement. 24 The Kazaks do not employ internationally accepted accounting standards. BHP Minerals was able to negotiate in its License Agreement that it would keep bookkeeping accounts in accordance with both the laws of Kazakstan and in accordance with the laws which are current in the country of the origin of BHP Minerals, or those adopted by the international practice. Major fiscal terms which we were able to negotiate in our License Agreement include the following: (at a signing bonus of zero, because the License was granted on risk terms; (b) a commercial discovery bonus of 2% of capital expenditures projected in the feasibility study (this bonus payment is to be made only after BHP receives all required authorizations to commence mining); (c) a production bonus of zero; (d) a sliding scale royalty ranging from 0 to 3%, as determined by BHP's internal rate of return; (e) an excess profits tax determined by BHP's internal rate of return; (f) the right to amortize equipment upon negotiated terms; and (g) assets imported by BHP Minerals, as well as the personal property of its foreign personnel, are to be free of import customs duties and excise. Tranaferability There is no provision under Russian law or regulation permitting a license to be transferred from the license holder to another entity. Mineral licenses stipulate that the license may not be transferred to a third party nor offered as security to a lender. In Russia, an 2~Article 69 of Edict No 2828.
Mining in Kazakstan: M J Neumann attempted assignment to an entity with foreign investment will trigger a new competitive bid. The Kazak law, which used to mirror the Russian law, has been modified by Edict No 2828. Article 14 of the Edict now allows conveyance by the license holder to any other entity upon obtaining permission from the Licensing Body. The license holder may now transfer the license or its right under the license to an affiliated company or subsidiary without the need to obtain such permission. Article 15 of the Edict now permits pledging the rights of the license holder to a financial lender. Because Edict No 2828 was approved following the negotiation of B H P ' s License Agreement, these were conditions which BHP had to negotiate into its License Agreement. BHP Minerals requires the right to transfer mineral licenses to third parties and will be reluctant to operate in a legal environment in which it is not able to freely transfer and encumber its mineral interests. A mineral license is a valuable property. The right of the investor to encumber and ultimately assign its interest in the license is essential to its ability to raise funds using the mine assets and mine production as collateral. If a license holder discovers a commercial deposit in which it has no strategic interest, it must be able to sell its mineral rights and recover the value it has added to the project. A license holder may desire to share risks and rewards with a joint venture partner. Those partners may desire to establish a joint stock company to which the license will be transferred. Investors can only operate successfully within legal systems allowing them to transfer their mineral rights and all other commercial rights. The recent changes in the Kazak mining law reflect these commercial realities.
Fundamentals of a successful negotiation BHP Minerals' contracts must be structured so that it places no more at risk and spend no more than is justified until a project warrants the exposure, the risks are understood, and BHP is able to mitigate identified risks. BHP Minerals' objective is to negotiate and structure its contracts in a manner designed to protect any value it adds to a project. Credibility The key to structuring a successful transaction in one of the countries of the former Soviet Union is relational. A foreign investor must establish trust and maintain credibility. This is easier said than done. The Soviet system of government and commerce was, and to a large degree remains, secretive and suspicious of the ways of the West. Western business concepts are not fully understood by the Russians or the Kazaks. To establish credibility, contracts in Kazakstan must be unambiguous and clearly explain how that
relationship will work. A foreign c o m p a n y ' s expectations must be clearly explained to avoid the appearance of making promises which are not kept. A foreign company must also understand the expectations of the Government. The transaction should be completely transparent. Recognition of problem areas All contracts in Kazakstan must recognize that there is a lack of effective institutions and legal precedent for enforcing property rights. The preference of BHP Minerals is for its contracts to provide for international arbitration. 2s The Kazaks, like the Russians and governments of other emerging countries, do not employ internationally accepted accounting standards. Our contracts must try to address convertibility of currency and payment of taxes. We must also anticipate the need for central bank approvals as well as other types of approvals which may become critical over time. Maintaining a continued presence Experience has taught BHP Minerals that the consequence of maintaining a sporadic presence in a host country will be to suggest to the governmental parties with whom we are negotiating that our intentions are not serious, with the inevitable result that neither our negotiations nor our projects progress in our absence. Although a foreign investor may not be able to justify opening and staffing an office or registering a branch in the foreign country until it has secured a mineral license under which it can operate, its personnel should manage systematic and frequent trips to negotiate, gather information, and make contacts. 'Out of site, out of mind' is an appropriate way to describe the attitude of various governmental agencies toward the many foreign mining companies expressing an interest in doing business in Kazakstan. Nothing material moves forward in the absence of the investor. BHP Minerals took advantage of Austrade 26, law firms, consultants, and other identified resources within Kazakstan to make its presence more consistent. Facilitators One method for establishing a continuing presence in a host country is to identify a local facilitator. Identifying a local facilitator also assists a foreign investor in finalizing a successful negotiation. A facilitator will have a thorough understanding of the political and legal framework within which a foreign investor must operate and of the individuals with whom which an investor must negotiate. A good facilitator attempts to move negotiations forward in the absence of the 25Article 27 of the Kazak Law on Foreign Investmentspermits resolution of disputes by international arbitration. 26Austrade is a trade organization which promotes foreign trade with Australian enterprises.
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investor. A good facilitator assists the investor to identify and resolve jurisdictional conflicts and overcome gaps in the existing regulatory process. Local legal counsel may also be adept at serving as a local facilitator. BHP Minerals has engaged the services of legal counsel in Kazakstan and other countries, such as Ethiopia and Tunisia, who have proven to be capable facilitators.
Other elements of a successful negotiation Other elements to a successful negotiation include the following:
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• choose a partner carefully (conduct due diligence to determine who your partner is, who the shareholders are, identify the decision makers, make sure that your partner is privatized before you develop a project or you might have to start the negotiation process over with the new shareholders); • be aware that partners sometimes disappear (Since BHP first initiated activities in Kazakstan, numerous semi-governmental entities with whom we negotiated contracts, such as Marzhan, have disappeared. This aspect of a fluid political and economic environment must be considered in identifying and choosing local partners); • assess the commercial risk of the project; and • treat your partner with respect.
The negotiation process was complex and the legal system is not well established. Establishing successful contracts and relationships requires great flexibility, patience, and hard work. BHP Minerals first had to understand the parties with whom it was negotiating and their expectations. Simultaneously, we had to educate them to understand us and our expectations. Clarity and transparency were keynote to establishing B H P ' s mining venture in Kazakstan. Political and legal changes in Kazakstan have created a dynamic and fluid environment in which we have had to continue to identify new and creative ways in which to operate after our mining venture was established. The matters discussed in this paper are just the more obvious legal issues which had to be addressed early in the process in order to establish our venture in Kazakstan. Our project geologists continue to experience an accelerated learning curve. They must find new and effective ways to work with their local counterparts, negotiate vendor contracts, and anticipate future problems. This paper did not discuss such operating issues. One such issue arises from the Foreign Corrupt Practices Act, 27 which has a significant influence on how our geologists may interact with local officials. Having established our mining venture, we must now continue our efforts to maintain that venture if we are to claim that we have achieved a successful mining venture in Kazakstan.
Summary There was no simple formula for BHP Minerals to establish a successful mining venture in Kazakstan.
2715 USCA §78dd-2.
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