By Ramona Monroe and Wade Foster
At its most basic level, to explore for minerals and develop a mine, a mining company must have three fundamental legal rights: (i) access to minerals (and secure mineral tenure), (ii) access to capital and (iii) governmental and social licenses. A well-trained mineral lawyer or landman who understands the industry is critical at each step.
The U.S. currently suffers from a severe shortage of lawyers, landmen and other professionals knowledgeable about minerals, mining and the business of mining. This article explains, from a legal perspective, the mineral exploration cycle and provides a foundation to understanding the legal and regulatory hurdles that are inherent in the business of mining in the U.S. This article is intended to educate mining sector service providers about the business of mining and encourage young people to explore a career in the mining sector.
Access to Minerals. The first step in acquiring mineral interests is generally due diligence. Lawyers and landmen play a key role in identifying and curing mineral tenure issues. For minerals on public lands, this often means determining whether (i) the lands were open and available for mineral location at the time of location, (ii) the specific minerals discovered were “locatable” at the time of location, (iii) the mining claims were properly established and (iv) the mining claims were properly maintained during every year since location. One must also look for conflicting claims and other surface rights that may have been granted despite the mining claim. Prospects on tribal or Native lands require different due diligence tasks. If the transaction involves acquisition of equity in an entity that holds the properties, due diligence on the entity should also be conducted.
If a project passes the due diligence phase, transaction documents must be prepared clearly spelling out the rights of all parties. Much early-stage exploration is conducted by junior mining companies. These companies often do not have internal sources of revenue and finance project acquisition by conveying shares, royalties, or other non-cash consideration. An earn-in agreement allows a company to earn a percentage interest in exchange for raising capital to conduct exploration activities. These juniors might also lease the properties for a relatively low annual fee in exchange for investing in exploration activities and undertaking to keep the mining claims in good standing. Both earn-in agreements and leases (which often include an option to purchase) require detailed agreements which spell out the rights of each party at all times that the agreement is in effect. An earn-in might also evolve into a joint venture (JV), which can be informal or formed as a limited liability company. The joint venture arrangements are typically negotiated with the initial earn-in and the unsigned JV agreement is attached to the earn-in as an exhibit.
Access to Capital. Absent a long-term earn-in agreement, a junior explorer is always looking for investors to fund the next season of field work. Armed with drill and assay results or other products of the prior season, the junior explorer shops its project to potential investors. Investments may occur through earn-in agreements, share transactions, a royalty sale, or other structure. These investments may be short-term (a single season) or long term. It is typical to do multiple rounds of fundraising to prove up an exploration project.
When a junior explorer conducts a share offering, a title report on the mineral tenure is typically required. Because title companies do not research or insure mineral interests, these reports are typically prepared by law firms.
When an explorer has established a commercial deposit, the project moves into prefeasibility and, if warranted, feasibility studies. At the prefeasibility stage, a conceptual mine design is prepared to determine whether the costs of development and production warrant full development of a mine. At the feasibility stage, engineering studies produce a more refined mine design and financial forecast. Land positions are often consolidated at this stage, with options exercised or new purchase agreements negotiated. If the feasibility study demonstrates financial viability, the proponent must secure financing and permits before beginning construction.
This is where the major mining companies often get involved. These are producing companies with revenue streams or balance sheets that can finance mine development. The transactions at this stage may require more detailed due diligence and title studies, as well as curative work to address any potential weaknesses or liabilities in the chain of title. Risk may be shared by adding joint venture parties or commercial lenders, who want to secure their interests in the mineral interests and personal property assets of the venture, as well as in as-extracted collateral. If not imposed by regulations, the permits are likely to require significant financial guarantees.
Governmental and Social Licenses. The greatest challenge to opening a new mine in the U.S. today is obtaining the various permits and overcoming legal challenges to obtain both the regulatory approvals and social license necessary to construct and operate a mine.
The proposed NorthMet (formerly PolyMet) copper-nickel mine in Minnesota provides a good example. The NorthMet project initially received its state and federal permits in 2018-2019. Among the necessary project authorizations were three approvals under the Clean Water Act (a surface water discharge authorization, a wetland fill permit, and a water quality certification), a state permit for potential groundwater discharges, an air permit, two dam safety permits, and a permit to mine from the State of Minnesota. A federal land exchange between PolyMet and the U.S. Forest Service also occurred.
Three of the major permits (permit to mine, combined surface water and groundwater permit and water quality certification) are legally inactive due to various judicial decisions. Earlier this year, the U.S. Army Corps of Engineers officially revoked the wetland fill permit following opposition from a downstream native American tribe, and comments from the U.S. Environmental Protection Agency, which raised concerns about water quality impacts. The dam safety permits and the land exchange, while currently active, remain subject to ongoing litigation. Thus, more than three years after the last of the required permits were issued for the NorthMet project, construction has not yet commenced.
The NorthMet project is just one example of regulatory hurdles in the U.S. that need to be addressed so that minerals needed for national security and economic stability can be produced domestically. Mining of essential minerals in the U.S. reduces dependence on foreign suppliers, protects our national security and economy, and employs some of the highest environmental and labor standards anywhere in the world. The U.S. needs more professionals to develop policies and regulatory modifications, support exploration and claim establishment, negotiate funding structures, and obtain the licenses needed to supply the growing demand for domestically produced minerals.
Ramona Monroe, partner, practices out of the Anchorage, Alaska office of Stoel Rives LLP where she co-chairs the firm’s mining group.
Wade Foster is an associate for Stoel Rives. Wade’s primary focus areas include mining, state water rights and compliance counseling for clients subject to federal and state environmental laws.