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14 January 2021
Africa's economic growth has historically been linked to the fluctuation of commodity prices. The modern economy increasingly relies on numerous components derived from minerals, such as:
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 approximately 28% of gross domestic product, and the potential for growth is immense. The Democratic Republic of Congo alone concentrates more than 50% of the world's cobalt reserves.
Against this background, some states and state-owned counterparts of mining investors in Africa have, in recent years, taken a series of measures perceived by investors as an attempt to force them to renegotiate their long-term agreements.
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 expenditure from investors in the sector. Return on investment can be expected only in the long term. This is why domestic mining codes typically include provisions which guarantee a stable tax and customs regime to investors over a protracted period, 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 initiate arbitration proceedings for breach of the stabilisation clause in the mining code or based on bilateral investment treaties.
Other points 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 and revenue balance set out in joint venture agreements, particularly regarding the underlying value of the mining title and even 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 point of dispute.
Faced with investors' reluctance to renegotiate joint venture agreements on their terms, some state-owned minority shareholders may attempt to have the joint venture company dissolved on the ground that it is undercapitalised, in breach of Organisation for the Harmonisation of Business Law in Africa law. This strategy may enable the minority shareholder to exert further pressure on the investor or 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?
For further information on this topic please contact Philippe Hameau, Janice Feigher, Marc Robert or Chloé Deydier at Norton Rose Fulbright by telephone (+33 1 56 59 50 00) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
This article is a revised extract from the first edition of Global Arbitration Review's The Guide to Mining Arbitrations, published in July 2019. To read the rest of the review or explore similar publications, click here.
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