With the continuous and vigorous development of the global new energy industry, major economic powers and multinational new energy giants have intensified their upstream development, which has also caused sharp fluctuations in the prices of bulk commodities, including lithium, copper, and cobalt. Chinese companies started their foray into African mining resources later than their Western counterparts. Currently, the top ten multinational companies involved in mining operations in Africa [1] are still dominated by Western companies. They are as follows: Anglo American plc, Rio Tinto Group, Vale S.A. (Brazil), BHP Billiton, Barrick Gold Corporation (Canada), Freeport-McMoRan Inc. (USA), Newmont Mining Corporation (USA), Teck Resources Limited (Canada), Kinross Gold Corporation (Canada), and Alcoa Inc. (USA). However, with the strong entry of Chinese enterprises, it is inevitable that it will lead to a reconfiguration of the mining investment strategic landscape.

With the continuous and vigorous development of the global new energy industry, major economic powers and multinational new energy giants have intensified their upstream development, which has also caused sharp fluctuations in the prices of bulk commodities, including lithium, copper, and cobalt.

Chinese companies started their foray into African mining resources later than their Western counterparts. Currently, the top ten multinational companies involved in mining operations in Africa [1] are still dominated by Western companies. They are as follows: Anglo American plc, Rio Tinto Group, Vale S.A. (Brazil), BHP Billiton, Barrick Gold Corporation (Canada), Freeport-McMoRan Inc. (USA), Newmont Mining Corporation (USA), Teck Resources Limited (Canada), Kinross Gold Corporation (Canada), and Alcoa Inc. (USA). However, with the strong entry of Chinese enterprises, it is inevitable that it will lead to a reconfiguration of the mining investment strategic landscape.

The scope of this article is limited to disputes arising from the equity acquisition of existing mining joint ventures in Africa by Chinese investors.

01 The alternation of new and old shareholders can easily trigger clauses such as "preemptive rights" and "equity transfer restrictions"

Zijin Mining announced on May 7th that recently, Congo's Minister of Mines, Nsanba, is about to sign a ministerial order granting the Manono lithium mining license to Dathcom Mining Company. Zijin Mining acquired a 15% stake in Manono Lithium Mine by acquiring a partial stake in Dathcom held by COMINIERE, a mining development company in the Democratic Republic of Congo.

However, the equity competition between Chinese and Australian companies surrounding this world-class lithium mine has not yet come to an end.

Aerial view of Manono lithium mine Image from: South China Morning Post

The Manono lithium mine is one of the world's largest known lithium, cesium, and tantalum (LCT) pegmatite deposits that can be mined using open-pit methods. The latest reports indicate that the total resource of the mine amounts to 401 million tonnes. The mine is 100% owned by Dathcom, a company based in the Democratic Republic of Congo. Dathcom was established in 2016 as a joint venture, and through multiple supplementary agreements, Australian company AVZ Minerals Limited, the National Mining Company of the Democratic Republic of Congo (COMINIERE), and Dathomir Mining Resources SARL hold respective stakes of 60%, 25%, and 15%.

In the equity transfer negotiations from July to September 2021, COMINIERE agreed to transfer its 15% equity and signed an agreement, allowing Jincheng Mining, a subsidiary of Zijin Mining, to acquire a 15% interest in the lithium project. However, the acquisition was strongly opposed and obstructed by the major shareholder AVZ. The local court in the Democratic Republic of Congo has twice ruled against AVZ and supported the equity transfer. AVZ revealed that it has recently received a notice from Jincheng Mining to submit an arbitration application to the International Chamber of Commerce ICC (Paris), requesting confirmation that Jincheng Mining holds a 15% stake in Dathcom Company.

The characteristics of mining development are long cycle, huge investment, and high risk. Many African countries do not have the conditions for independent development and often need to attract foreign investors. When the uncertainty of mineral development increases, new investors are introduced, existing investors withdraw, control rights change hands, or shares are diluted, which can easily lead to friction.

AVZ stated that COMINIERE's equity transfer violated the shareholder's preemptive rights agreement in the original agreement, while COMINIERE believed that the transfer was made in compliance with preemptive rights clause. Due to the confidentiality of the agreements signed by several parties and the fact that the local courts in the Democratic Republic of Congo have not publicly disclosed relevant judgment documents, we are unable to directly conduct case analysis on the Manono lithium mine rights. However, it can be seen that the focus of the dispute between the two parties is on the issue of "preemptive rights".

In 2016, another high-profile acquisition by a Chinese company in Africa attracted global attention. China's Luoyang Molybdenum Co., Ltd. acquired a 56% stake in the joint venture company Tenke Fungurume Mining (TFM) in the Democratic Republic of Congo for a staggering $2.65 billion. TFM was established in 1996 and holds the rights to develop the world's largest and highest-grade copper-cobalt deposits.

Luoyang Molybdenum Industry has also been challenged by the "preemptive rights". In this acquisition case, Gécamines(founded in 1906 and later became a mining giant with 100% control of DRC state-owned assets), a shareholder representing the government of the Democratic Republic of Congo (DRC), was obstructed . Gécamines holds a 20% undiluted stake in TFM and believes that Freeport-McMoRan Inc. in the United States sold its TFM interest without its own consent, violating its preemptive rights.

Figure: Acquisition Path of Luoyang Molybdenum Industry

From its establishment in 1996 until the acquisition initiated by Luoyang Molybdenum in 2016, TFM underwent two major changes in its equity ownership, which occurred in 2005 and 2010 respectively. In 2010, the focus was on increasing Gécamines' undilutable shareholding in TFM from 17.5% to 20% and supplementing certain provisions of the mining agreement. Many of the provisions in the shareholder agreement and mining agreement from 2005 were carried forward and remained in effect.

The 2005 TFM Shareholders' Agreement (Revised Edition) [3] is a publicly available document. The author searched for specific terms of the agreement, including Article 15.4, which restricts preemptive rights for shareholders to transfer shares to non shareholder third parties (bona fide third parties and third-party offers will not be revocable for at least 80 days). The transferring shareholder must send a copy of the third-party offer to all other shareholders and submit an equally conditional transferor offer, other shareholders have preemptive rights within 30 days.

But the 2005 TFM shareholder agreement also made a special provision for equity transfer, Article 15.8: Lundin Holdings Ltd. allows for transfer to development entities. Without prejudice to Article 9.5, Lundin Holdings Ltd. may transfer its shares to any multilateral development entity, including but not limited to the International Finance Corporation and the Industrial Development Corporation (South Africa), even if there is any provision to the contrary in this Article 15 ）And CDC Group PLC to provide convenience for project financing. Any such transfer shall not be subject to the preemptive rights of other shareholders as stipulated in Article 15 of this Agreement or the Articles of Association. In this case, T.F.M. will notify Gécamines in accordance with Article 5.1 (b) It can be seen that Lundin Holdings Ltd. (renamed TF Holdings Ltd. in 2010) can break through the restrictions on other shareholders' preemptive rights in general terms by transferring shares to multilateral development institutions, and its obligation to G é mines is limited to notification.

According to reports, Gécamines filed an international arbitration lawsuit against Freeport-McMoRan in the International Chamber of Commerce ICC (Paris) in 2016, demanding the exercise of preemptive rights to purchase 56% of TFM indirectly held by Freeport-McMoRan Inc., but it was questioned that it did not have the financial capability to achieve the acquisition. In the end, Luoyang Molybdenum Industry successfully obtained a 56% equity interest in TFM.

However, it should be noted that the TFM shareholder agreement clearly stipulates that TFM shares are divided into A/B shares. Gécamines is a Class A shareholder, although they only hold 20% of the non-dilutable shares, they do not need to bear financing obligations, and have special powers such as designating 2 seats on the board of directors and appointing Vice Chairman; The remaining shareholders are Class B shareholders. Although Luoyang Molybdenum Industry has acquired 80% of TFM's equity through two acquisitions, it still falls under the category of B-class shareholders and is subject to the checks and balances of A-class shareholders.

In addition to the "preemptive right" provision, in the process of joint development of mineral resources, the agreement can also include other restrictions on the transfer of shares, such as the requirement to obtain prior written consent from other shareholders. In the supplementary agreement signed in 2013 between Gécamines and Group George Forrest S.A. (a Luxembourg company) for the joint venture (cobalt alloy waste processing plant), there is a specific provision under the general clauses (dispositions générales) section, namely:

“3.1 Unless otherwise provided in the framework agreement and the operating documents defined therein, neither party shall, without obtaining the prior written consent of the other party, sell, transfer, pledge, or distribute in any form the shares it holds in the joint venture company.”

“3.2 Unless otherwise provided in the framework agreement and the operating documents defined therein, the provisions of Article 3.1 shall not apply to the sale or transfer of shares to an affiliated party of either party (i.e., its subsidiary or parent company), provided that the sale or transfer involves the entire shareholding and is lawful, requiring relevant authorities' approval for restructuring.”

3.3 (omitted here)

"3.4 Any transfer not covered by Article 3.1 or 3.2 must obtain prior written consent from all parties. For the avoidance of doubt, any transfer made in accordance with the provisions of Article 3.1 or 3.2 shall not affect the rights under any guarantee agreement and the guarantees provided therein."

02 Dispute Resolution Track for African Mining Acquisition Equity Disputes

The specific content of each investment-related agreement will reflect individual differences, combined with the varying negotiating positions of different host countries in different transactions. Additionally, the reliance of investors and host countries on the local judicial system and international investment dispute resolution institutions may differ, as well as the existence of bilateral or multilateral investment agreements and relevant international conventions between the host country and the investor's home country. These variables contribute to significant variations in the choice of dispute resolution mechanisms.

From the above cases, it can be seen that when a mining joint venture development company experiences a dispute over equity transfer, the most crucial issue is which party's interests are represented by the dissenting shareholders, which directly determines the direction of dispute resolution.

In the case of the Zijin Mining vs. AVZ lithium mine, AVZ initially opposed the transfer of shares by the Congolese state-owned mining company, COMINIERE, which represents the interests of the host country. AVZ filed two lawsuits in the Lubumbashi Commercial Court in the Democratic Republic of Congo, which focused on corporate governance issues such as the convening of shareholders' meetings and the annulment of shareholders' resolutions. At present, Zijin Mining has transitioned from being a "third-party acquirer" to a new shareholder, directly confronting AVZ. They are seeking a resolution to the issue of the transfer of rights to Manono lithium mine through international arbitration at the ICC, addressing the issue of investment entity through the confirmation of share transfer rights. From this perspective, the dispute exists between two different foreign investors.

The dispute over the acquisition of TFM shares by Luoyang Molybdenum Mining Co., Ltd. (Luoyang Moly) involves a foreign investor and a state-owned enterprise representing the interests of the host country. Fortunately, Luoyang Moly has successfully acquired the TFM shares. The copper-cobalt mixed ore project is expected to commence production in 2023, with an estimated annual increase in copper production of around 200,000 tons and an annual increase in cobalt production of approximately 17,000 tons.

When a new investor conflicts with existing investors or with the host country,the choice of dispute resolution mechanism may vary. However, from the perspective of ensuring the safety of foreign investors, resorting to international arbitration is generally considered a consensus.

We can refer to the disclosed 2005 TFM Shareholders Agreement as a reference. Article 16 of the agreement provides the following provisions regarding dispute resolution:

16.1 Settlement

If a dispute arising from, related to, or in violation of this Agreement, except in cases of emergency, the parties raising the dispute shall convene a meeting to attempt to reach a negotiated settlement before resorting to arbitration or legal proceedings. The responsible persons of the relevant parties (or their representatives) shall convene the meeting within 15 days upon receiving an invitation letter from the most diligent party. If the meeting is not held within the specified time, or if the dispute is not resolved within 15 days after the meeting through a written agreement signed by all shareholders, any party may submit the dispute to arbitration or initiate legal proceedings in accordance with Article 16.

16.2 Arbitration

(a) Binding Arbitration. Any dispute, claim, or breach arising from or related to this Agreement that is not resolved pursuant to Article 16.1 above shall be resolved through arbitration in accordance with the rules of the International Chamber of Commerce (ICC). The arbitration shall be conducted by three arbitrators appointed in accordance with the said rules, and the place of arbitration shall be Geneva, Switzerland. The arbitration proceedings shall be conducted in both French and English. The arbitral award shall be in writing and shall be rendered in both French and English, and it shall be binding on both parties. Depending on the circumstances, the enforceability of the arbitral award may be determined by a competent court or an application may be made to such court for recognition and enforcement of the arbitral award.

(b) Decision: The decision of the arbitrators shall be final and binding on the parties, and it shall take effect immediately upon notification to the parties in accordance with Article 17 of this Agreement. The arbitral award must clearly state the arbitrators' determinations on each issue submitted to them.

(c) Expenses. (Omitted here)

16.3 Disputes with the Host Country

If a party considers that the dispute is connected to a dispute arising under the "Amended and Restated Mining Agreement" between one or more parties and the Host Country, it must first submit the issue of this connection point to arbitration in accordance with Article 16.2. If the arbitral tribunal confirms the connection point in the arbitration proceedings pursuant to Article 16.2, the latter must declare itself without jurisdiction. In this case, the most diligent party may jointly submit the two disputes considered to be connected to the International Centre for Settlement of Investment Disputes (ICSID) for resolution, in accordance with Articles 25 and 26 of the "Amended and Restated Mining Agreement," and Gécamines must accept the jurisdiction of the ICSID. If the arbitral tribunal, in accordance with Article 16.2 of this Agreement, conducts arbitration and finds that there is no connection between the two disputes, the two disputes shall be resolved separately in accordance with the arbitration procedure provided for in Article 16.2 of this Agreement and the provisions of Articles 25 and 26 of the "Amended and Restated Mining Agreement" concerning the disputes involved.

16.4 Jurisdiction

(a) The enforcement of an arbitral award may be made by any court having jurisdiction or an application may be made to such a court for the recognition and enforcement of the award, depending on the circumstances.

(b) All disputes or claims arising out of or in connection with this Agreement or any breach thereof shall be subject to the jurisdiction of the Swiss Court of Geneva only when the arbitral tribunal referred to in Article 16.2 or Article 16.3 (and Article 6.6) declares it to have no jurisdiction (unless the arbitral tribunal referred to in Article 16.2 has declared it to have no jurisdiction in accordance with Article 16.3, in which case the arbitral tribunal referred to in Article 16.3 shall have jurisdiction).

16.5 Waiver of execution immunity

Gécamines hereby waives any immunity from the execution of the dispute resolution procedure contained in Article 16.

From the detailed provisions of this clause, we can see that the dispute resolution of foreign investors participating in the development of African mining investment can be arranged at four levels:  1) Precedence of settlement or mediation; 2) Disputes arising from the performance of agreements between equal parties fall under the jurisdiction of international commercial arbitration institutions; 3) Disputes between investors and host countries are resolved by arbitration institutions with a certain international public law character, such as ICSID; 4) When international arbitration lacks jurisdiction, the dispute is referred to a neutral court in a third country.

Obviously, this dispute resolution arrangement is not beneficial to the host country.

In the past decade, sovereign African countries have accelerated their legislation and amendment of laws on natural resource development, forcibly increasing the proportion of state-owned shares or local ownership, and striving to retain more profits from mining development upstream and downstream within their borders. Some African state-owned mining companies, including Gécamines, are also attempting to renegotiate the content of mining agreements and shareholder agreements with foreign investors in joint ventures. This will cause unease among foreign investors in the future, leading to an increase in the number of international arbitrations.

03 Conclusion

Many African countries still heavily rely on a single mineral for their exports. For example, fossil fuels (including coal, oil, and natural gas) account for over 90% of Algeria, Equatorial Guinea, Libya, and Nigeria's export revenue; Zambia, Mozambique, Namibia, Mali, Guinea, Gabon, Sudan, Sierra Leone and other countries account for over half of the country's mineral exports.

As Penda Diallo, a lecturer at the University of Exeter's Cumbourne School of Mining, stated in his book "Guinea: Political Stability, Social Turbulence, and Bauxite Mining" published in 2020, mining is not just an economic issue for African countries, it always involves politics and society. Simply analyzing the situation and taking action based on economic principles or logic often leads to delays or failures. Ignoring political factors and neglecting returns to local society can lead to serious and unpredictable problems, such as nationalization risks, political liquidation, local social unrest and shocks.

Therefore, in order to avoid prolonged and costly international disputes during and after the equity acquisition process, we suggest that Chinese investors join an existing mining joint venture company and consider all possible disputes that may arise during the transition between new and old shareholders. Prior to the acquisition, it is recommended to conduct detailed due diligence.

The due diligence process should not only involve a thorough examination of the specific rights and obligations of the existing shareholders, the legal and contractual procedures for equity transfer, and whether the existing dispute resolution clauses are clearly unfavorable to Chinese investors, as outlined in the original shareholders' agreement, mining agreement, and joint venture articles of association. It is also recommended to investigate beyond the documents. This includes assessing the actual performance of the original mining agreement, the relationship between the original shareholders and the host country, the risk of mining license expiration without the possibility of extension, whether the project has undergone a legitimate and effective environmental assessment, whether there are any land disputes or labor issues with the local community, and whether consensus can be reached with the host country on supporting infrastructure development and maintaining a positive relationship with the local community. Ultimately, the goal is to achieve sustainable development in mining operations and a mutually beneficial outcome with the host country.

References

[1] : "Deep | The Rise of Resource Nationalism in Africa amidst the Self-indulgence of the West", WeChat official account "Wall Street News", May 5, 2020

[2] World Class Manono Lithium Mine Development in the Democratic Republic of Congo: Zijin Mining Holdings 15% ", WeChat official account" Zijin Mining ", May 7, 2022

[3] https://congomines.org/system/attachments/assets/000/000/286/original/A2-TFM-2005-StatutsPublicationSECLundinTFHoldingRDCGecamines.pdf?1430928341  

[4] According to reports, Canada's Lundin Mining, as another major shareholder of TF Holdings, waived its preemptive rights when Luoyang Molybdenum acquired the equity held by Freeport-McMoRan. In 2017, Luoyang Molybdenum acquired a 4% stake in TFM24 held by Lundin Mining in Canada through Bohai Huamei (Shanghai) Equity Investment Fund Management Co., Ltd. (BHR), ultimately becoming the majority shareholder holding 80% of TFM20.