As mineral-rich West Africa becomes one of the world’s fastest-growing mining destinations, a number of West African states have recently amended or are in the process of amending their mining codes to attract foreign investment to the minerals sector. Driven by record prices for iron ore, as a result of strong demand from China’s steel industry, six of the world’s biggest mining and steel companies, Vale, Rio Tinto, BHP Billiton, Arcelor Mittal, Severstal and Chinalco, have converged on Guinea, Sierra Leone and Liberia where some of the world’s most valuable deposits of iron ore are found.

Mali
The government of Mali, Africa’s third largest gold producer, has signalled its desire to become an iron ore producer and is set to introduce a new mining code in October, 2010 to encourage more investment in its minerals sector.

ECOWAS
The Economic Community of West African States or Communauté économique des États de l’Afrique de l’Ouest (“ECOWAS” in English and “CEDEAO” in French), a regional organization of 15 member countries, is working towards establishing a unified mining code for the sub-region. In May 2009, ECOWAS issued a directive on the Harmonization of Guiding Principles and Policies in the Mining Sector (the “ECOWAS Directive”) which sets out the guiding principles for harmonizing mining regulatory regimes across member states. The ECOWAS Directive calls for a common mining policy to be implemented concurrently with the unified mining code by the end of 2012. Member states will have until July 1, 2014 to comply with the ECOWAS Directive. We will revisit the ECOWAS Directive in a later issue.

Sierra Leone
Sierra Leone is one of the ECOWAS member states that has recently embarked on major reform of its regulatory infrastructure to attract foreign direct investment after a decade-long devastating civil war which ended in 2002. The country has indicated its intention of becoming Africa’s biggest exporter of iron ore.

Iron ore has historically been exploited in the Marampa region, and one in-country operator, African Minerals Limited (“African Minerals”), recently announced a JORC Compliant mineral resource at its flagship Tonkolili project of 10.5 billion tonnes. According to African Minerals, the Tonkolili iron ore deposit constitutes the largest JORC compliant magnetite reserve in the world. Earlier this year, the company agreed to a deal with China Railway Materials Commercial Corporation (“CRM”) to develop the deposit. CRM, a China state-owned steel trader, is reported to have acquired a 12.5 per cent equity stake in African Minerals for £168m.

Besides iron ore, Sierra Leone is currently the world’s fourth largest producer of rutile (accounting for approximately 16 per cent of world production and 5 per cent of proven reserves) and is also a major producer of bauxite and ilmenite. Additionally, Sierra Leone has proven substantial alluvial and kimberlitic diamond deposits and the diamond fields cover an area of 7,700 sq miles - about a quarter of the surface area of the country. Despite this significant mining potential, the minerals sector remains underdeveloped as investment in the sector has been impeded by the absence of a stable and transparent mining legal framework.

The Mines and Minerals Act, 2009 which came into effect in 2010 (the “Act”), is now the primary legislation governing the mining sector in Sierra Leone and is an important step in transforming the development of the mineral sector in the country. The Act addresses a number of issues not previously covered by law, including health and safety, environmental protection and community development and also formalizes a central cadastre system which will maintain a register of mineral rights and mineral rights applications, as well as serve as a repository for mineral exploration data collected by the government. The Act also introduces stricter rules for administrators and mineral rights holders, including reporting requirements.

The new licensing process introduced by the Act creates more logical categories for mineral rights, and addresses some of the prior confusion regarding prospecting and exploration and exclusive and non-exclusive licences. At the identification of minerals stage, a reconnaissance licence which replaces the old prospecting licence may now be issued for a one-year period. The reconnaissance licence provides a logical entry point for investors to identify specific areas for more extensive exploration. Exploration licences may be issued for an initial period of four years and may be renewed for a further maximum period of five years. A significant change to the licensing regime is that holders of exploration licences may now explore for all minerals. Under the old regime, licenses were issued for specific minerals and this created a great deal of uncertainty when miners exploring for one mineral found a different mineral and had to be re-licensed.

At the production stage, small scale mining licences and large scale mining licences may now be issued. Corporate holders of small scale licences must have 25 per cent Sierra Leonean ownership whereas there is no restriction on the nationality of holders of large scale licences.

Holders of mineral rights licences issued under the old regime will continue to hold those licences until their normal expiry.

Two of the new requirements which apply to mining licences have caused some concern in the international investment community:

• the introduction of a community development requirement; and
• the government’s right to participate in a mining project as it matures, on terms that are to be negotiated between the government and the licence holder.

Producers are required to enter into a community development agreement with the primary host community if certain production thresholds are met. The primary host community is the single community of persons mutually agreed on by the holder of the small-scale or large-scale mining licence and the local council. The licence holder must expend 0.1 per cent of the gross revenue earned by the mining operations in the previous year in every year that the community development agreement is in force.

The government’s right to participate in a mining project is more problematic. Concerns have been expressed in some quarters about the level of administrative discretion and resulting uncertainty created by this provision, and the lack of express parameters within which the specific terms of government participation will be negotiated.

The Act also introduces a new royalties regime which increases the royalties paid to government from mineral production. Royalties are based on the actual sale price on an arm’s length transaction and vary from a 6.5 per cent gross royalty on diamonds (increased from 5 per cent), a 5 per cent royalty on gold (increased from 4 per cent) to a 3 per cent royalty on all other minerals. Special stones, which are defined as stones having a market value of over $500,000 USD, will carry a royalty rate of 15 per cent. It is not entirely clear whether market value is based on a notional arm’s length price or the actual sales price.

The Act contemplates the development of a framework for transparency in reporting and disclosure of information related to revenues and payments by both mineral right holders and the government. The country’s participation in the Extractive Industries Transparency Initiative (EITI) has helped to facilitate this process. Under the initiative, the public is entitled to information on payments and revenues derived from minerals extraction.

The Act is supported by administrative regulations in respect of the issuance and management of mineral rights. A new Diamond Trading Act is also being introduced to govern internal trade and import and export of rough diamonds to ensure compliance with the Kimberly Process.

By introducing objective criteria for awarding exploration and mining licenses, the Act has made the licensing process more transparent and has eliminated some of the bureaucratic gridlock which has historically provided opportunities for corruption. However, the continued negotiation of “special agreements” between the government and individual mining companies which are outside the ambit of the Act is a cause for concern.

Moreover, unlike the legislation governing the mining sector in jurisdictions like Botswana and Ghana, the Act does not contemplate investment protection mechanisms, such as stabilization agreements, international arbitration or other alternative dispute resolution avenues, where the licence holder is a non-resident. In view of the fact that the political stability of the countries in the West African sub-region, including Sierra Leone remains vulnerable, the inclusion of effective investment protection mechanisms in the Act would have provided additional comfort to international investors.

The Canadian Securities Administrators (“CSA”) Publish Proposed Changes to National Instrument 43-101 Standards of Disclosure for Mineral Projects.

Many public companies with resource properties in Africa obtain financing in the Canadian capital markets and are required to disclose information relating to their resource properties in accordance with the requirements set out in National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”). NI 43-101 governs the disclosure of scientific and technical information about mineral projects of issuers listed on Canadian stock exchanges.

On April 23, 2010, the CSA published its proposed amendments to NI 43-101 (the “Amended Instrument”), Form 43-101F1 - Technical Report and Companion Policy 43-101CP, for a 90-day comment period. The purpose of the amendments is to, among other things, reflect the changes that have occurred in the mining industry and correct areas where the current regime is not having the effect intended by the CSA. The proposed amendments, if implemented, will increase the acceptance of foreign mineral resource and reserve categories and foreign standards for qualified persons.

The proposed amendments will also trigger consequential amendments to other regulatory instruments including National Instrument 44- 101- Short Form Prospectus Distributions (NI 44- 101), Form 51-102F1 Management’s Discussion and Analysis, Form 51-102F2 Annual Information Form, National Instrument 45-106 Prospectus and Registration Exemptions and National Instrument 45-101 Rights Offerings.

The complete set of proposed amendments may be viewed at http://www.osc.gov.on.ca/ en/15019.htm. Some of the more salient proposed amendments to NI 43-101 are summarized below.

Increased Acceptance of Foreign Codes and Foreign Standards for Qualified Persons

Among the proposed amendments is the replacement of the prescriptive list of acceptable foreign codes with a more flexible objective test for acceptability and the elimination of the requirement for issuers to reconcile foreign resources and reserve categories with Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) classifications.

Currently, NI-43-101 allows issuers with mineral properties outside of Canada to disclose mineral resources and mineral reserves using either CIM categories or any of the following acceptable foreign codes: the Australasian Joint Ore Reserves Committee Code (JORC); the South African Code for Reporting Mineral Resources and Mineral Reserves (SAMREC); the SEC Industry Guide 7 (USA); and the Classification System and Definitions of Mineral Resources and Mineral Reserves approved by the Institution of Materials, Minerals and Mining in the United Kingdom (IMMM).

The Amended Instrument expands the definition of “acceptable foreign code” to include the Pan-European Code for Reporting of Exploration Results, Mineral Resources and Reserves (“PERC Code”) which has replaced IMMM, the Certification Code for Exploration Prospects, Mineral Resources and Ore Reserves (Chile) or any other code generally accepted in a foreign jurisdiction that defines mineral resources and mineral reserves in a manner that is consistent with the CIM classifications.

The Amended Instrument also provides more flexible standards in respect of the qualification of foreign professionals. Under the current regime, engineers or geoscientists who wish to be recognized as qualified persons must be in good standing with a prescribed professional association. The Amended Instrument instead requires good standing with a foreign association that is generally accepted within the international mining community as a reputable professional association as well as meeting requirements applicable to all professional associations. A list of recognized acceptable foreign associations is included in Companion Policy 43-101CP as a guideline.

Triggering Events Obligating the Filing of a Technical Report

(i) Short Form Prospectus Offerings

The CSA is considering whether to eliminate the current requirement in NI 43-101 for an issuer to file a technical report on the filing of a preliminary short form prospectus under National Instrument 44-101. Currently, such a filing is required unless the technical information in respect of a material property contained in the preliminary short form prospectus is already conThe CSA is considering whether to eliminate the current requirement in NI 43-101 for an issuer to file a technical report on the filing of a preliminary short form prospectus under National Instrument 44-101. Currently, such a filing is required unless the technical information in respect of a material property contained in the preliminary short form prospectus is already contained in a previously filed technical report. The CSA has acknowledged that the requirement to prepare a current technical report when filing a preliminary short form prospectus imposes extra costs and limits an issuer’s ability to complete offerings on a timely basis. The CSA is asking stakeholders whether they rely on technical reports when making or advising on investment decisions in a short form prospectus offering.

(ii) First Time Written Disclosure of Mineral Resources, Mineral Reserves or Preliminary Economic Assessments

Under the Amended Instrument, issuers will be obligated to file a technical report in connection with any first time written disclosure (other than disclosure in a document in respect of which another technical report trigger relates) of mineral resources, mineral reserves, or preliminary economic assessments in respect of a material property which constitutes a material change to the issuer.

(iii) Elimination of Grandfather exemption for certain producing properties

The Amended Instrument will also remove the “grandfather” exemption that enabled some issuers to avoid having to prepare technical reports regarding producing properties that had been operating prior to the implementation of NI 43-101 in 2001, if technical information in respect of such properties had been disclosed in certain documents including an Annual Information Form (“AIF”) or short form prospectus filed prior to 2001. This will create a technical reportfiling obligation at the first triggering event (such as the filing of an AIF) for previously grandfathered properties.

Exemption for Royalty Interest Holders

The Amended Instrument proposes to exempt royalty interest holders from the regulatory burden of filing a technical report if the information concerning the project is publicly available and was prepared by an issuer subject to the Amended Instrument or a producing issuer whose securities trade on a “specified exchange” as such term is defined in NI 43-101.

Certification and Consent Requirements

The Amended Instrument dispenses with the current requirement to provide updated certificates and consents of qualified persons for previously filed technical reports, provided that there is no new scientific or technical information in respect of the property and the technical report continues to meet applicable independence requirements. This will greatly facilitate the timely execution of M&A and corporate finance transactions by allowing the issuer’s own internal qualified person to determine whether a technical report is still current.

A consequential amendment of NI 44-101 - Short Form Prospectus Distributions is that issuers who are required to obtain an expert consent from a qualified person in connection with a previously filed technical report will be permitted to obtain such expert consent from the firm that employed the qualified person at the date of signing of the technical report as opposed to the qualified person who authored the technical report provided that the firm’s principal business is providing engineering or geoscientific services and the person signing the technical report is an authorized signatory of the firm and a qualified person within the meaning of the Amended Instrument. The CSA has recognized that it can be difficult or impossible for an issuer to obtain updated certificates or consents due to qualified persons being temporal employees or otherwise unreachable on short notice.

Deadline Extensions for Filing Technical Report following a property acquisition

The Amended Instrument extends the deadline for filing a technical report when an issuer acquires a material property that constitutes a material change. Currently NI 43-101 requires the issuer to file a technical report within 45 days of disclosing a preliminary assessment, mineral resources or mineral reserves regarding the property. If implemented, the proposed amendment would extend the deadline to six months if another issuer who holds or previously held an interest in the property previously filed a technical report on the property and that report is still current. At the time of filing the technical report, the issuer must issue a news release disclosing the filing of the technical report and reconciling any material differences between the new technical report and the initial disclosure.

Amendment to Form 43-101F1

It is proposed that the current form of Form 43- 101F1 Technical Report be amended to make it less prescriptive and more suitable for advanced stage and producing properties. The proposed Form 43-101F1 (the “Amended Form”) will allow qualified persons to refer to information from previously filed technical reports to the extent such information is still current, provided a summary or quote of the referred to technical report is included in the current technical report. However, a qualified person may not disclaim responsibility for the referenced information.

The Amended Form also expands the scope for qualified persons’ interpretations and conclusions as it provides for a discussion of significant risks and uncertainties that could be expected to affect the reliability or confidence in the exploration information, mineral resource or mineral reserve estimates or projected economic outcomes.

The “Reliance on Other Experts” section will also be revised to amend the circumstances in which qualified persons may disclaim liability for information provided by other parties. Under the proposals, qualified persons may rely on information provided either by the issuer or by third party experts where the information pertains to legal, political, environmental or tax matters relevant to the technical report as well as on pricing and valuation information provided by third party experts. The amendments would no longer allow qualified persons to disclaim liability for third party information relating to other issues and factors which are not prescribed.

Written by Avril Cole and Monica Peters

This article highlights only certain aspects of the legislation discussed and does not constitute legal advice.

Add to: del.icio.us | Digg | NewsVine | Mixx | FaceBook | Twitter