Mining statue

Mining arbitration in Africa

An overview of recent disputes trends

Global Publication November 2020

Introduction

Africa’s economic growth has historically been linked to the fluctuation of commodity prices. Modern economy indeed increasingly relies on a number of components derived from minerals such as copper, cobalt, bauxite, iron-ore, tin, lithium or gold. For instance, smartphones and electric vehicles are powered by rechargeable lithium-ion batteries, a component of which is cobalt. According to the African Natural Resources Centre of the African Development Bank, minerals account for an average of 70% of total African exports and about 28% of gross domestic product and the potential for growth is immense. The Democratic Republic of Congo (DRC) alone concentrates over half of the world’s cobalt reserves. 

Against this background, some states and state-owned counterparts of mining investors in Africa have, over the past few years, taken a series of measures perceived by investors as an attempt to force them to renegotiate their long-term agreements.

Overview of disputes trends 

In particular, several African countries have amended their national legislation to significantly increase taxes and royalties on revenues derived from mining activities with immediate effect. Major changes to customs regimes have also been introduced. African states claim that the changes are aimed at better distributing revenue from mining activities to the local population. 

The mining industry requires significant capital expenditures from investors in the sector. Return on investment can only be expected in the long term. This is the reason why domestic mining codes typically include provisions which guarantee a stable tax and customs regime to investors over a protracted period of time, providing foreseeability on these heads of costs.

In light of the above, the legislative changes introduced by several African states to their national mining code have given rise to multiple disputes. International mining companies have or may thus initiate arbitration proceedings for breach of the stabilisation clause in the mining code or on the basis of bilateral investment treaties.

Other bones of contention between state-owned entities and foreign investors relate to their respective rights under joint venture agreements. Contractual relationships between state-owned entities and mining title holders are typically governed by a joint venture agreement which refers to the domestic mining code as applicable law. The investing mining company contributes the capital investment, know-how and expertise to the joint venture, whereas the state-owned entity, which generally holds a minority shareholding, contributes the mining licences. African state parties have shown a growing dissatisfaction with the contribution/revenue balance set forth in joint venture agreements, in particular regarding the underlying value of the mining title and all the more so in greenfield projects. In this regard, indexation clauses and the basis for valuation of the licence (mining capacity versus actual extraction) are specific areas of concern. Mine shutdowns by investors in the presence of a slump in commodity prices is another source of litigation. 

Faced with investors’ reluctance to renegotiate the joint venture agreements on their terms, some state-owned minority shareholders may attempt to obtain the dissolution of the joint venture company before local courts, on the ground that it is undercapitalised, in breach of OHADA law. This strategy may enable the minority shareholder to exert further pressure on the investor or to eventually regain control over the mining titles which could then be allocated to another investor on more favourable terms. 

Another recent trend in mining arbitration in Africa is the increased reliance by states and state-owned entities on environmental issues but also the treatment of such issues by arbitral tribunals. Recent case law tends to show that compliance with domestic legislation aimed at protecting the environment could become a requirement for an investor to claim protection of its investment in international arbitration proceedings. Could this be the sign of the emergence of an international environmental public order?

This article is an updated excerpt from the authors’ article in GAR’s Mining Guide – Africa, 2019 and is reprinted with permission of the publishers. The full article can be read here.

 

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