Using Collaborative Contracting Structures for Critical Minerals Exploration Opportunities in Australia

By Jay Leary and Jaya Prasad

Summary

• Global investment in the clean energy transition has placed increased demand pressures on critical minerals supply chain
• Australia is already a key player in the critical minerals market but there is further opportunity to expand Australia’s offering to the global market
• Key risks include geological scarcity, sovereign and geopolitical risk, trade policy obstacles, and difficulties with extraction and processing of outputs
• Australian companies can seek to benefit from the increased critical minerals demand while managing the risks associated with critical minerals investment by entering into collaborative partnerships
• Collaborative contracting structures allow supply chain proponents to negotiate bespoke commercial arrangements that dictate each party’s contribution and risk allocation

Critical minerals have been vital to the global economy for decades, supporting industries including, energy, transport, healthcare, telecommunications and defence.

Critical minerals are now recognised as vital to the energy transition and green revolution, as they are key inputs in the clean technologies and energy transition projects.

As global investment in green technologies grows (including EV and battery storage), the growth in global demand for critical minerals has placed increased pressures on existing supply chains.

This growing demand provides an opportunity for Australia, with significant reserves of a range of critical minerals, to explore critical mineral extraction and processing operations.

What are critical minerals?

A critical mineral is any mineral resource that is:

(a)  essential for the functioning of modern technologies and economies; and

(b)  at risk of supply chain disruptions.

The Australian government considers 26 mineral resources to be critical minerals, selected based on Australia’s geological endowment and potential global technology demands, including:

• lithium
• rare earth elements
• vanadium
• tungsten
• cobalt

A full list of all critical minerals published by Geoscience Australia can be accessed here.

Key risks to the critical minerals supply chain include geological scarcity, sovereign and geopolitical risk, trade policy obstacles, and difficulties with extraction and processing of outputs, which contribute to market volatility and immaturity and lowers incentives to investment.

Critical minerals in Australia

Australia is already a key player in the critical minerals market as the world’s top producer of lithium and rutile, the second largest producer of zircon and ranks in the top 5 for production of cobalt, manganese ore, tungsten and vanadium. Australia produces commercial quantities of 10 of the 26 critical minerals identified by the Australian Government and has demonstrated resources for another five.[1]

The Australian Government released an updated Critical Minerals Strategy in March this year (Strategy)[2] to incentivise and support investment in critical minerals supply chain. The Strategy sets out Australia’s long-term plan to leverage growing global demand for critical minerals and increase Australia’s contribution to the sector.

The key objectives of the Strategy are:

• establishing stable and secure supply chains
• expand skills and capabilities in downstream processing of critical minerals to add greater value to Australia’s contribution in the international market
• creation of additional regional jobs and economic growth for regional communities

Australia has since leveraged existing trade relationships with America, India and Japan (formalised under the recently signed Critical Minerals Partnership),[3] establishing commitments towards building secure critical minerals supply chains between Australia and each relevant economy. Using these partnerships, Australia can garner investment in collaborative ventures in the critical minerals industry, from research and development and pilot studies through to commercial projects. These international agreements help Australia to solidify trade pathways for critical minerals demand and its reputation as a reliable supplier of resources to the world.

Opportunities

The growing global demand for critical minerals, coupled with Australia’s significant demonstrated reserves and commitment from the Australian Government places Australian mining companies in a position to benefit from investing in critical mineral exploration.

In addition to the opportunities available in greenfield critical minerals exploration, there are commercial opportunities available to repurpose existing exploration and mining operations to take advantage of existing infrastructure and supply chains, including:

• co-production of critical minerals occurring at existing sites (eg cobalt and tellurium occurring with copper)
• establishing new processing and extraction facilities on existing sites
• post-production extraction of metals, such as deriving metals from mine waste (tailings extraction)
• mine closure and rehabilitation planning

To ensure that any benefits earned from critical minerals exploration and processing activities are not offset by the material geological, political, trade and investment risks associated with critical minerals, sharing of risk allocation can be achieved by utilising collaborative contracting structures.

Contracting structures

With mining exploration being highly speculative, and mineral commodities influenced by cyclical movements, the use of collaborative contracting structures in the mining industry allow multiple proponents in the supply chain (e.g. the project owner, contractors, infrastructure providers and service providers) to add value and share risk while working towards a mutual advantage.

Collaborative structures can also be used as a means to mitigate the heightened geological, political and extraction and processing risks associated with critical minerals Collaborative contracting allow parties to negotiate creative commercial arrangements that play to their strengths and expertise, while sharing risk allocation and liability.

Examples of collaborative contracting arrangements include:

• unincorporated joint venture agreements
• incorporated joint ventures
• partnerships
• strategic alliance contracts
• joint ventures for broader ranges of the supply chain

Unincorporated joint venture

Remaining the most popular structure for two (or more) parties to engage in mining projects, unincorporated joint ventures involve the parties entering into a contract setting out each party’s rights and obligations. As exploration is a capital intensive process with delayed returns, an unincorporated joint venture agreement will also consider financing obligations and revenue structures. Property is owned and disposed of between the joint venture participants as tenants in common, in proportion to each party’s participating interest. Unlike an incorporated joint venture (see further detail below), as no separate legal entity is created, the parties commercially negotiate risk allocation and liability for specific risks.

Incorporated joint venture

An incorporated joint venture creates a special purpose vehicle, owned by the joint venture participants in shares proportionate to the party’s participating interest. This structure is a separate legal entity, and each party’s participating interest typically dictates its proportion of investment, expenses and returns. The corporate entity created is able to own, deal with and dispose of assets in its own right, sue and be sued, and enter into legal arrangements itself, and is subject to corporations regulation. Risk and loss in an incorporated joint venture is borne by the entity, shielding its shareholders (the joint venture participants) directly from loss. Shareholders will only be liable up to their respective contributed capital.

The establishment of an incorporated joint venture will require the parties to enter into a shareholders’ agreement to regulate the entity’s operation, as well as compliance with a company constitution.

Partnerships

Parties that enter into partnership arrangements are able to negotiate commercial terms regarding capital investment and revenue entitlements, but will also be bound by the relevant jurisdiction’s partnership legislation. Similar to an incorporated join venture, the partnership owns the assets, however the partners’ ability to gain return from those assets is derived from any surplus proceeds available after the partnership’s assets and liabilities are recognised on dissolution. Risk is shared jointly across all partners, and the extent of this liability is unlimited, regardless of each partner’s contribution of capital (limited partnership structures are available). Each partner owes a fiduciary obligation to all other partners.

Strategic alliance contracts

Used predominantly early stage exploration projects, alliance contracts are a flexible means of beginning a new relationship where neither party is willing to commit too heavily. Alliance contracts are also useful where results are highly speculative and the parties wish to quickly commence work. Alliance agreements present a good starting point, but generally are not suitable as a primary project execution vehicle. Alliance agreements are also useful where parties with different skills wish to pool their resources in a new region, industry or technology.

Summary of contracting structures

	Unincorporated joint venture	Incorporated joint venture	Partnerships	Alliancing
Separate legal entity created?	No	Yes	No	No
Liability	Dependent on contract terms. Generally several liability, not joint, and limited to extent of participating interest.	Separate legal entity responsible for liabilities. Limited to shareholding, which is dictated by participating interest.	Unlimited, joint and several liability for all liabilities for all partners in the partnership.   Note: Limited liability partnership arrangement available where agreed under contract, where liability is limited to total capital contribution.	Dependent on contract terms.
Statutory obligations	No specific legislation applies.	Corporations legislation applies to separate legal entity.	Partnership legislation applies. Fiduciary obligations as between partners.	No specific legislation applies.
Capital contribution	Dependent on contract terms, typically proportionate to participating interest.	Proportionate to shareholding, which is dictated by participating interest.	Proportionate to partnership interest.	Dependent on contract terms.
Ownership	Dependent on contract terms. Typically, assets owned in proportion of participating interest.	Assets owned by separate legal entity.	Assets owned by partnership.	Dependent on contract terms.
Disposal	Proceeds distributed directly to parties dependent on contract terms.	Disposal by separate legal entity, with profits retained by entity or distributed as dividends proportionate to shareholdings.	Disposal by partnership, with profits retained or distributed dependent on partnership agreement or otherwise in equal shares.	Proceeds distributed directly to parties dependent on contract terms.
Instrument	Joint venture agreement	Shareholders’ agreement, company constitution	Partnership agreement	Alliance contract

 

Key considerations

When deciding which collaborating contracting structure to use for exploration activities, parties should consider:

• Majority interest: Who will be the project ‘owner’ – one party will hold a majority interest and will be expected to assume responsibility for key risks
• Operator: Who will be the project ‘operator’ – which party is responsible for operational tasks such as obtaining approvals, consents and third party negotiations? Will this party have a sole control over these decisions or be the ‘face’ only?
• Capital: The extent to which each party is responsible to contribute capital, and the structure and timing of such investment obligations – will significant security or third party financing be required?
• Returns: How will profit or return be measured under the arrangement? What are the thresholds or incentives to those returns? Is the allocation of profit proportionate to each party’s proportion of capital contribution?
• Risk allocation: Is risk shared between the participants, or clearly delineated to a single participant? Is the allocation of risk consistent with each participant’s interest in the project?
• Intellectual property: Which party will own intellectual property developed or generated by the project? How will licensing of intellectual property be managed?

[1] https://www.ga.gov.au/scientific-topics/minerals/critical-minerals.

[2] https://www.industry.gov.au/sites/default/files/2022-09/2022-critical-minerals-strategy_0.pdf.

[3] https://www.minister.industry.gov.au/ministers/king/media-releases/australia-japan-strengthen-critical-minerals-cooperation.