4th Annual Investing in Africa Mining Seminar - London

1. Strategies for achieving "Bankability" for mining projects in Francophone Africa 4th Annual Investing in Africa Mining Seminar - London Stéphane Brabant, Partner, Herbert Smith LLP 29 November 2010

2. Contents • General legal environment of a natural resource project in francophone Africa • Complexity of a mining project • What does "Bankability" mean to a lawyer? • Instability and natural resource project • International soft law: a risk for Foreign investors • Some specific risks attached to Africa Need to know where the project is located and how it will be financed in order to decide what to do 4751353_1

3. Francophone countries Spanish and Portuguese speaking countries English speaking countries Arabic / French speaking countries Arabic / English speaking countries A continent of cultural and legal diversity Like the rest of the world, Africa is a continent of diversity... …with different influences and languages A world where 6,000 languages are STILL spoken – a number of them in Africa – but one international business language, the terms of which can have different meanings 4751353_1

4. An Overview of African Legal Systems NATIONAL LEGAL SYSTEMSCommon law and civil law traditions Two legal systems in Africa(sometimes complemented by Islamic law or customary law) Systems based on civil law principles French legal system (Napoleonic Code) Portuguese, Spanish and Italian legal systems (largely based on Roman law) Systems based on common law principles Mixed civil law / common law based systems 4751353_1

5. Two different legal approaches(State and Public / Strategic Interest) Common Law (Prevalent law governing financing agreements, international contracts and a number of Energy/ Natural Resource companies) Contractual approach Law of precedents • Civil Law • (Law governing Projects in mostnon-English speaking countries) • Main source of law: • Written rules • Administrative law and the courts • Mandatory Provisions • Case law (less important/limited power of judiciary)  • Differences in: • Property law • Criminal law • Company law • Laws on taking security • Insolvency law  • Negotiation (Negotiable vs. non negotiable) • Drafting • Settlement of disputes 4751353_1

6. Sub-Regional Organisations within Francophone West African Countries OHADA UEMOA CEMAC 4751353_1

7. Strict control Actors of a natural resource project RESPECT OF HOST STATE’S LEGAL SYSTEM (Stability – Arbitration) MINING COMPANY (Exploration: Foreign Investors Exploitation: Local Companies) POPULATION (Treaties / "Soft law") • STATE • NATIONAL COMPANY • SHAREHOLDERS • STOCK EXCHANGE Contract Elections Right to explore/exploit(titles) • BANKS Security Access to site DEPOSIT (Sovereignty/Res Nullius/Ownership) • SUB-CONTRACTORS • BUYERS • SUPPLIERS • NGOs 4751353_1

8. DEPOSIT What does a lawyer see when he looks at a natural resource project?Necessity for legal clarity where there is factual complexity DIVIDENDS HOST STATE JUDICIARY PRIVATE LEGISLATIVE EXECUTIVE ECAs ADMINIS-TRATIVE COURTS LOAN COURTS BANKS $ $ HEDGE AGREEMENT HEDGE PROVIDER HOST STATE’S LEGAL SYSTEM $ BANK ACCOUNT PRIVATE LAW ADMINISTRATIVE LAW BANK ACCOUNT $ EXPLOITATION PERMITS MINING COMPANY MINING/OIL AGREEMENTS DIVIDENDS INTERNATIONAL MINING/OIL COMPANY $ EXPLORATION PERMITS SALE OFFTAKER $ EPC (SUB) CONTRACTOR WARRANTIES HOST COUNTRY OFFSHORE 4751353_1

9. “Bankability”… = "Likely to Ensure Financial Success" * • … of natural resource projects = All conditions (geology, prices, political, legal, etc.) for minerals in the ground to be: • Explored • Mined • Processed • Transformed • Transported • Exported • Sold… With "profits" for all "stakeholders": a very (recent) specific condition required for a mining project to be long term, and thus “bankable”… * Source : The free dictionary by Farlex, internet 4751353_1

10. From a lawyer’s perspective • To identify what banks/ECAs "would" require in order to provide Project Finance (even if it is not) = the best guarantee for the project to: • be a valid / binding / enforceable / long term natural resource project • develop within an adequate legal framework for financing • It may also be best to first "value" a project as an asset (and to then find partners, etc.) • The lawyers of the sponsors must work with banks in order to anticipate what finance lawyers as well as potential partners may say = is it a "Bankable Project"? • What are the “Laws of the Bank”? 4751353_1

11. A Checklist of a "bankable" project • Check how contract was awarded and approved • Ratifying legislation • Signatures by the correct people • Procurement rules • Transfers and assignments • Corruption • Ability to grant attractive security to Lenders • What are the risks that the government will seek to renegotiate terms? • What is the host state’s history of expropriation, renegotiation, unpredictable changes in law, arbitrary acts by the government, difficult government relations? 4751353_1

12. Which laws apply (to the project)? • = Legal system of the host state • Civil law / Common law (Hierarchy of norms – Due Diligence) • "Mining" titles (Exploration, Exploitation, Concessions, Chain of titles) = Security of tenure • Oil and Gas / Mining agreements (Stability – arbitrability; STATE contract) • Infrastructure • Company law • Security law • Laws of "Public Interest" (labour, tax, expropriation, etc.) = to know and anticipate the law (and the overall context / environment) of the project 4751353_1

13. Which laws will apply (to the financing)? • = The Law applicable to the Project Financing The law of the financing (Common law) can be different from the law of the Project (Civil law) thus requiring a number of issues to be adapted, including: • Exchange control regulations (borrowing from non-residents; offshore accounts; repatriation, etc.) • Security over cash-flows • Security over project assets (shares, equipment, mining rights, property rights, substitution rights, etc. vs. "floating charge") • Step-in rights and Direct Agreements • Offtake Agreements, EPCs, etc. 4751353_1

14. Particular issues in relation to civil law security • Type of security package (floating charges, trust structures, fiducie) - Practical difficulty in taking local security and ownership issues/rights • Perfecting security – registration fees, renewal and notification requirements (particularly for immovable property) • Enforcement procedures – pivotal and discretionary court procedure • Transfer of ownership to the lender under court supervision • Transfer of ownership to the lender pursuant to a contractual provision (pacte commissoire) • Sale of the asset at auction and distribution of proceeds • Enforcement: Necessity for State consent – importance of direct agreements • Taking security over foreign bank accounts – exchange control and repatriation requirements - Cash flows from onshore to offshore 4751353_1

15. Bankability and security package (I) Security Package – pragmatic approach to be adopted by the banks • Security over mining title • Mortgage (hypothèque) over the Mining Title (where possible) • Mortgage (hypothèque) over the land (issues re public property) • Security over mining agreement • Security over production • Charge over inventory (nantissement de stocks) • Charge over movable tangible assets (nantissement de biens meubles corporels) • Security over shares in local company • Charge over Sponsor’s share capital (nantissement de compte d’instruments financiers/de parts sociales) 4751353_1

16. Bankability and security package (II) • Security over the business • Charge (nantissement) covering the business, goodwill, equipment and facilities Security over claims • Charge over bank accounts (nantissement de comptes bancaires) (restrictions under OHADA) • Charge (nantissement) or assignment by way of security (cession à titre de garantie) over trade receivables • Security over non tangible assets • Trade marks • Patent • Direct agreements • Direct Agreement with the State (including step in rights) • Direct Agreement with key third parties (including step in rights) 4751353_1

17. Bankability – Some key issues Thorough Due Diligence Protection under treaties – BITs Protections built into State contracts • Stabilisation – do not try to cast the net too wide • Dispute resolution – but focus on settlement • Direct Agreements • Correcting title problems • Approving loans, security interests and hedging arrangements • Approving offshore bank accounts • Facilitating enforcement of security • Approving step-in rights 4751353_1

18. Responses to instability1. Stabilisation provisions Stabilisation clauses i.e. contractual protection against subsequent changes to legal regime or certain aspects of legal regime • "freezing clauses" – law applicable to contract will not change over the life of the project • "renegotiation clauses" – agreement to adjust the economic terms of the contract (consider when this is triggered) • "intangibility clause" – agreement by government not to terminate or amend contract 4751353_1

19. Responses to instability2. International Arbitration International arbitration • Avoids local courts • "Internationalises" the contract Bilateral investment treaty protection • Treaties between government of host state and government of country where investor is incorporated • May offer additional or different protection • Political protection • Consider choosing your investment vehicle • Expropriation / Creeping expropriation / Fair and Equitable Treatment 4751353_1

20. "Bankability" may depend upon a number of issues (aside from geology), some of the key issues being: • Volatility of commodity prices • Supply chain risks • Shortage of skilled workers • Escalations in development and operating costs And: • HIV/AIDS • Xenophobia • Extreme political risks (creeping expropriation) • Infrastructure related problems (power shortages) • Changing legislation and regulatory reform • Physical limit to the number of commercially exploitable resources available + "nothing available"… "A booming industry in a changing world" 4751353_1

21. International soft law: A “risk” for Foreign Investors • Executive Summary • HRs / States / Multinational Companies (MCs) • Thousands of recommendations, resolutions, etc. to/by States and MCs • Soft law with hard sanctions (T. Wälde): NGOs, Stock Market, Equator Principles, courts and reputational risk (new law makers for markers) • ISO 26000 and CSR, entry into force on the 1 November 2010 • International Existing Agreements and Model Mining Development Agreement (IBA) – Draft 4 October, 2010 • From soft law to International Public Interest (Kenya award 2006) • John Ruggie’s initiative or the 3 pillars for protecting HRs: • State to protect against HRs abuse by third parties including business • Corporate responsibility to respect HRs (to act with due diligence – to avoid infringing rights of others) • Remedy: exploring options at all levels in order to obtain effective remedies Guidelines for responsible contracting and markers for negotiation (2011) • To reconcile protection of foreign investments with treaty obligations on human rights (HRs) – Arbitration (Argentina – Suez case – July 2010) • From illegal to illicit and from illicit to illegal or HRs: the evolving legal value of an evolving • concept 4751353_1

22. Key Challenges arising when investing in Africa • Lack of clarity of some energy, mining, company and tax laws and their interpretation, or no relevant law • Erratic publication of regulations and case law and lack of consistency in the interpretation of the law (by local courts and administrative authorities) • New trend of "resource nationalism"/creeping expropriation (due to unstable governments or volatile price of natural resources) • Implied laws and mandatory laws mean that there may be more than the contents of the contract • Difficulty in finding viable local lawyers to advise on international projects • Corruption/transparency issues • Payment default risks for economic transactions with companies in African states • Influence of NGOS 4751353_1

23. The fundamental risks of an African mining project • Not all risks can be addressed through intelligent legal drafting • Political risks / State counterparty • Pricing: commodity prices and worldwide demand • Geological and technology risk • Environmental • Sponsor (importance of due diligence on all stakeholders) • Operational (escalations in development and operating costs, skills • Shortages, infrastructure related (power shortages) • Additional/heightened risks for integrated projects (supply chain, infrastructure … etc.) • Reputational risks • Social risks 4751353_1

24. Conclusion Better than a "Political Risk Insurance": • "Fair sharing of benefits between the company, the local community and national governments" • A well-balanced and drafted contract from scratch • Legal, licit and legitimate Resource curse/blessing: an issue concerning all with consequences for all The role of extractive industry lawyers is becoming more and more complex "Competent counsel can no longer afford to neglect relevant international 'soft law'" 4751353_1