A Joint venture farm-in mining exploration agreement is an agreement between parties in relation to ownership and exploration activities over an exploration right.
Joint venture farm-in arrangements are a useful opportunity for junior exploration companies to gain access to exploration assets owned by third parties. Farm-in arrangements are also a mechanism for junior miners that hold title to promising deposits to attract major mining companies that are seeking to expand their exploration portfolio.
In the case of early-stage exploration, investments or acquisitions are commonly at project level and parties often adopt an unincorporated joint venture structure allowing the contribution of financial and technical expertise. For more mature projects, the investor will acquire a majority or minority equity interest in the entity that holds the mining rights. The stage of the project will inform the mechanism for the investment or acquisition.
To acquire a stake in an unincorporated joint venture, the investor and the holder of an exploration right will enter into a farm-in arrangement which is an agreement to spend an agreed amount of capital expenditure and undertake an agreed work programme in order to earn an agreed stake in the project over an agreed period of time. This may be accomplished through a staged earn-in process in which the investor earns a percentage interest at different stages of exploration based on expenditure commitments and exploration work milestones.
Why a Farm-in Arrangement?
For the investor, a farm-in arrangement presents an opportunity to gain access to scarce exploration assets which they otherwise would not be able to access given that they do not hold title to the exploration right. This is particularly true in the case of Zambia where many exploration assets are held by hoarders with limited financial capacity to undertake any meaningful exploration works. This means that a prospective investor must enter into a farm in arrangement with an existing exploration licence holder.
For an exploration licence holder, a farm-in arrangement assists them maintain their interest and title to the mining right by facilitating the funding of exploration work in accordance the exploration programme, which they may lack financial capacity to do in order to comply with the licence conditions. As a result, a farm-in arrangement reduces the risk of violating the licence conditions and losing the licence.
Risk
Structuring a farm-in arrangement is all about identifying, evaluating, eliminating, reducing, mitigating or allocating risk, with the overarching aim of balancing objectives, expectations and needs. Farm-in arrangements are not without risk and the success of a farm- in arrangement lies in understanding the needs and objectives of the parties, the regulatory framework, the risks they present and structuring the transaction appropriately. For the exploration right holder, one of the key objectives is ensuring expenditure commitments are met and that exploration works are undertaken timely within the agreed period. For the investor, the key objective is ensuring that they earn an interest in the project and ultimately legal title to the asset. One of the fundamental issues for an investor is whether they earn an interest in the exploration right immediately or after performance of the agreed work programme. Upfront earn-in would be disadvantageous to the holder of the exploration right if the farm- in conditions are not met. Critical to the right to earn-in is the regulatory consent required to implement such a transaction and determining at which stage this is to be obtained given the risks involved.
The farm-in agreement needs to be carefully crafted to cover all eventualities and regulatory risks. Termination is also an issue that needs to be carefully considered. An investor would want to ensure that they have exclusivity and that the exploration right holder cannot easily terminate the agreement should another suitor come along. The exploration right holder also needs to have the flexibility to terminate the agreement should the investor be unable to raise capital to meet funding commitments.
If you would like further information on farm-in arrangements or assistance with negotiating and structuring joint venture farm-in agreements, please contact: Sharon Sakuwaha at Sharon.sakuwaha@moiramukuka.com or Mumbi Mulenga at mumbi.mulenga@moiramukuka.com.