Beyond Hourly Podcast

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Geoff Moysa:
Hello and thank you for tuning in to the Beyond Hourly Podcast, hosted by Omni Bridgeway, one of the world's most experienced dispute funders and enforcement specialists. Our podcast focuses on commercial disputes around the globe and innovative ways to maximize value for clients and law firms. Episodes of this podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify, and other podcast networks. We welcome you to subscribe to the podcast and leave us reviews.

My name is Geoff Moysa and I'm your host for today's podcast. I'm an Investment Manager and Legal Counsel based in Omni Bridgeway's Toronto office. Prior to joining Omni Bridgeway, I was a Litigation and Arbitration Partner at McMillan LLP in Toronto. My role at Omni Bridgeway involves in part assessing investment opportunities in the mining space and beyond, and serving as a strategic resource for the parties we fund throughout the funding relationship.

This episode is the second in a two-part series about mining disputes. If you haven’t already listened to our first episode in the series, I encourage you to do so. The discussion in that episode focused on upstream mining disputes and international arbitration. This second part of the series covers downstream commercial disputes in the mining industry.

I'm delighted to be joined again by our special guests, Junior Sirivar of McCarthy Tétrault in Toronto, and Jon Drimmer of Paul Hastings in Washington. Welcome back, and let's dive right in.

I wanted to shift gears and discuss the types of commercial disputes that arise in the downstream mining industries, when raw materials are now being processed and sold. Junior, you mentioned in our earlier episode that royalty disputes are common in your practice. Can you tell us a bit more about the types of disputes you're seeing, and what you think is driving them from a business perspective?

Junior Sirivar:
I think historically; certainly in my practice I was seeing, and we were seeing, a lot of joint venture disputes, shareholder disputes. Until the more recent history, there has been a spike, a fairly significant spike in the disputes relating to interpretation of royalties. Whether it's, as we were talking about earlier, the expenses that can be deducted or otherwise.

For me, that's been the most significant change in terms of the types of disputes. A disproportionate amount of the disputes that I'm dealing with are in the royalty context, in one form or another.

Geoff Moysa:
And why do you think that is that it's royalty, as opposed to other types of business disputes? Like pricing adjustment or supply, or other commercial disputes that can arise in this context?

Junior Sirivar:
I think it has to do in part with the nature of the royalty agreements themselves. They're entered into at a point in time when one party is typically exiting a project, or has made a decision to divest itself of a particular project. Or in some cases, an operating mine.

The actual payment of the royalty either has operated a certain way amongst certain partners. Then the dispute arises because a new partner comes into the relationship, looks at the words of the agreement; which of course, govern the royalty; and interprets them differently.

Or, in the context of an acquisition or divestiture, some third party looks at an agreement that's been interpreted a particular way, anew. And comes up with a different interpretation. But all of which speak to, I think, the longevity of the relationship that's created in the royalty context.

A royalty agreement, by its very nature, means that you've got a relationship that has phases that are decades long. Of course, you've got the period after the royalty agreement is entered into before production, which can last numerous years. You've got the portion of the relationship after production, when the royalty's payable. And throughout the life of the royalty, given the nature of mining assets, you can expect multiple owners of the project. More and more often now, we see that the royalty itself is something that is being sold. Not as part of a broader transaction, but parts of royalties are being acquired. Or, all of the royalties being acquired by the specialized entity, or experts in the field.

Jon Drimmer:
Yeah, if I can come in as well: I agree with everything that Junior says. Certainly, what the parties intended, versus what's written on paper, can be one of those major drivers. And years later, when you have new employees and new parties who are interpreting the document, that can certainly lead to disputes.

But also, some of the royalty provisions are either complicated or a bit ambiguous. And that does lead to these differing interpretations. I think they're good-faith differing interpretations. I'm not seeing people who are looking to unduly profit off of interpretation of a royalty provision. Actually, they are good-faith interpretations. They may have meant something different to the people who drafted it. They may be ambiguous in writing.

But I completely agree with Junior that there is a big uptick in the number of royalty disputes.

Geoff Moysa: 
In your experiences, do these disputes get resolved by way of negotiation? Or do they go to the distance?

Junior Sirivar: 
That's a good point. And it really underscores the point that Jon just made, which is what we're seeing are good-faith differences of interpretation. And they are actually being adjudicated.

If it were otherwise, you would expect to see a significant number of these disputes being resolved. If in fact the interpretation was being taken for the purposes of generating leverage from one party's perspective or the other.

But certainly, in my practice; and it sounds like Jon's seeing the same thing; we're seeing them argued through to resolution.

Jon Drimmer: 
Yeah. To some extent, they naturally lend themselves to an arbitral process where you can have expedited proceedings. And sometimes you are seeing very fast-track approaches. They are litigated, or they're adjudicated in front of experts who are able to parse through and interpret both the language and the nature of the practice in the industry. So, to some extent, you have these complicated and good-faith differing opinions that can move fairly quickly to resolution before an expert. In many ways, it does lend itself to going the distance.

Geoff Moysa: 
Yeah. And it would not be in terms of the long-term agreements that you spoke of, Junior. It would not be unusual, historically, to see these royalty agreements structured for life of mine, or some other long-term scenario. And I wonder: given what seems to be an increase in disputes around these obligations, do you see the landscapes shifting at all, in terms of how these royalty agreements are being structured?

For instance, do you see shorter terms? Do you see price adjustment mechanisms? Do you see more nuance in them?

Junior Sirivar:
I haven't seen shorter terms. The bulk of what I'm seeing is still a life-of-mine-type relationship. But what we do see is considerably more focused on the specifics of the agreement itself. A lot of negotiation around the rate, of course; but also, a lot more negotiation on the deductions that can be applied to the revenues and calculating the royalty.

We are seldom seeing the sort of gross overriding type royalties that were of some prevalence in the  past. We're now seeing royalties that are at least intended to be aligned from the perspective of the royalty holder, and the profits generated by the operator themselves. So, you will see a lot of negotiation over those sorts of issues. Particularly because the operators also have to contend with the fact that there are often multiple wealthy burdens on the same asset, which obviously speaks to the profitability.

A curious interplay in that the royalty holder themselves also often has the same concern. Because obviously, if you have a third burden on the property and you affect the economics of the mine, it may be the case that the mine doesn't go into production.

Geoff Moysa: 
Speaking of the other burdens that may be, and the multiple royalties or layers of obligations; Jon, I'm wondering if you've seen any increase in these disputes that result from the rise of the specialized mining royalty business itself. The companies that actually specialize in assessing and taking or buying these royalties.

Jon Drimmer: 
I do think so, but I think it connects with something Junior said not long ago, which is, there are a variety of reasons that people will go back and look at royalties to value them in different ways. Either to assess as part of a sale of a property or a joint venture or something like that, and I think the rise of mining royalty companies is another one of those factors.

You can see what your royalty is ultimately potentially worth and how to value it. There is a potential buyer for that royalty, or a portion of that royalty. So, I think the re-examination of a royalty and its value and how the payments are ultimately determined, it can manifest in a number of different ways. And the rise of royalty companies is one.

Geoff Moysa: 
I think that that tracks, and I would agree with the comment that mining royalty disputes are certainly the most prevalent ones that we see in the downstream commercial context, from what we evaluate as a litigation funder.

I'm wondering if either of you have insight as to why that might be, and why it might be that those disputes are litigated or arbitrated more frequently than other types of mining commercial disputes. For instance, do those just get resolved? Are they easier to resolve somehow?

Jon Drimmer: 
Yeah, it's a good question. I mean, I think, certainly you do have good-faith disputes on both sides, and where there is a real disagreement on the merits, I mean, that is certainly an impact.

There are also discrete issues that you don't have to bring in a ton of fact witnesses and look at a lot of the complexities that are associated with other disputes. You're not looking at extraneous issues and facts and motivators. It really is the interpretation of a contract provision.

So, in the end, I think that the discreteness of it, and the fact that you do have good-faith arguments on both sides; those are the real drivers, as far as I can tell.

Junior Sirivar: 
To Jonathan's point, the bulk of the royalty disputes have very little room for factual disputes. Because the agreement typically includes an entire agreement clause, which makes what the parties' subjective views of what the royalty agreement says, essentially irrelevant.

They're neatly packaged disputes in the sense that it's a good-faith assessment and a good-faith interpretation that just differs from your counterparty. Your ability to have it resolved in a reasonably short period of time is easier.

And usually, the dollar amount at issue, given that the life-of-mine nature of the relationship is usually well worth the dispute being taken to attend.

Geoff Moysa: 
Yeah, from a practitioner's perspective, what's the universe of evidence and the moving parts look like in a typical royalty arbitration? It doesn't sound like you're dealing with a lot of fact witnesses. Are you dealing with experts? What does the record look like?

Junior Sirivar: 
I've had a number of different contexts. But if you're dealing with the validity of a royalty agreement and you're dealing with misrepresentation claims, then you're obviously dealing with a full factual record. But that would be the, I would think, a decided minority of cases that would involve that level of dispute.

Most of what you're arguing about would be in the category of whether a specific type of deduction is allowable under the royalty agreement itself. That is, generally speaking, a function of what the agreement says.

Now, the parties will almost always put in evidence about how the royalties have been interpreted up until that date. To the extent that the arbitrator finds that there's an ambiguity that's, of course, an ability for the adjudicated to rely on the subsequent conduct and the interpretations of the parties have given to the agreement to resolve an ambiguity.

But absent an ambiguity, then the record would typically just include the royalty agreement itself. Some basic facts about the fact that the mine is in production, which obviously would trigger the obligation to pay the royalty, and generally, from a narrative perspective, includes how the royalty has been paid; if at all.

That is typically what the record would look like in the cases that I'm seeing.

Jon Drimmer: 
Yeah. You may get a witness in there to talk about the negotiation and what was intended, and that might be supplemented with correspondence that went back and forth at the time of drafting, or if there's been some kind of discussion about calculation of the royalty along the way. I mean, Junior is exactly right. It is typically a fairly straightforward and more limited record.

Junior Sirivar: 
Yeah. Certainly. And subject to that kind of evidence, having its own inherent limitations when you're talking about what's at issue, which is really just a contractual term. So, it is interesting to hear how those shape up in practice.

Geoff Moysa: 
When we started the podcast, we had also mentioned, just given the timing and the context where we're recording this; November of 2020, and we're well into the COVID pandemic. We had spoken about some of the pressures that had put on countries and decision-makers in terms of their own cash constraints.

There's also been a lot of commentary in terms of extractive industries and litigation in general. An expectation that there will be a lot of flow of litigation that has to do with force majeure clauses or broken deals. I'm wondering if you're seeing any of that activity come to fruition in the extractive sector.

Jon Drimmer: 
From my standpoint, I'm actually a little surprised that we have not; at least, yet; seen the volume that we originally expected. I had certainly expected an avalanche of cases, whether it was involving suppliers or insurers or others. And I just have not seen that avalanche; that really, I've been expecting for quite some time.

Now it's certainly true that folks may be waiting, and cases might come in 2021. But today, the number of cases that we really anticipated just hasn't arisen.

Junior Sirivar: 
That's been my experience as well. We've certainly done a lot of studying and research on force majeure in anticipation of a flood of cases, but that just hasn't materialized. On the transactional side, I don't think we're seeing, certainly in Canada, broken deals in this sector as a result of COVID-19.

Geoff Moysa: 
Yeah. Conversely, I was going to say, have you seen an uptick in M&A activity around these properties and these projects?

Junior Sirivar: 
I would say as a general comment on the Canadian context: If anything, it's been steady, or with an uptick.

Jon Drimmer: 
Well, I'd say on the U.S. side, we're seeing an uptick as well. Not a giant change, but I think it is an uptick.

Geoff Moysa: 
What do you think is driving that? Is it just that there are projects and companies in need of capital? In need of partnership? And there's still actually an appetite to provide that?

Jon Drimmer: 
Well, I think to some extent, there are good buys out there to be had for mid-size and larger companies. I think it has to do, frankly, with pricing and the ability to obtain a favorable transaction.

Junior Sirivar: 
And as someone once said that the minerals will always be in the ground. So, the question at any point in time is whether or not the value is there to transact. If you look at gold prices as an example, gold prices have remained high. And the expectation is, so long as there's a global pandemic, the gold price will, as an example, likely remain high.

The value is there. And opportunities often are born in circumstances such as these. And I think this particular sector is in line with that thought process.

Geoff Moysa: 
Certainly. On the topic of M&A activity and opportunities that come up ... I mean, look, we know a lot of mining companies are publicly traded, raise money on the public market. One area we haven't really touched on is whether we see disputes arising in that context. For instance, in the securities context. Jon, what are you seeing there?

Jon Drimmer: 
Yeah, I mean, we've seen this for the last few years. A rise of disclosure cases against mining companies that are premised on securities-related filings; representations and statements that are made public. You end up then having some issue or incident in that same space as the statement was made, same subject matter. Then you have a lawsuit that is filed, if there's a subsequent stock drop.

That's really been a fairly substantial uptick in the U.S. over the last five, six years based on health and safety issues, environmental issues. Other issues, again, predicated on securities disclosure laws. I don't think that's going anywhere. I think we're going to continue to see that. But there has been a notable rise in the last few years.

Geoff Moysa: 
And Junior, I wonder if from a Canadian perspective, if we see the same thing in Canada. The Canadian market is obviously a little bit not as well-developed in the securities class-action space as perhaps the U.S.

But given the concentration of mining companies that are headquartered and listed here, are you seeing a flow of those type of disputes in your practice?

Junior Sirivar: 
Surprisingly, I think the experience has been slightly different in Canada on that particular point. Certainly, on the environmental side, the concerns that Jon just identified are concerns that we see going forward in terms of the types of disputes.

But there have been, at least in Ontario, recent amendments to our Class Proceedings Act that make it more difficult on the plaintiff's side to have your class certified, which may impact proposed class plaintiffs' willingness to invest the sort of money in a class action than they otherwise would.

I would say in the Canadian context, we would expect to see a steady flow of environmental-based class actions. But the class action forum itself, I wonder whether the most recent amendments in Ontario in any of that will have an impact on the volume we see.

Geoff Moysa: 
Yeah. I think there's a lot of different areas of class actions that are waiting to see what the effect of those amendments are, being as recent as they are. Perhaps stay tuned for another podcast on that subject as time goes on.

Well, that brings us to the end of our podcast. Thank you very much, Jon and Junior, for being our guests on Omni Bridgeway's Beyond Hourly Podcast, and for sharing your knowledge and expertise with our listeners.

Jon Drimmer: 
Well, thanks for having me. I really appreciate it, enjoyed the conversation. Junior, it's always great to chat about these issues and bat things back and forth.

Junior Sirivar: 
Likewise, Geoff and Jon. It's been an absolute pleasure. Thank you.

Geoff Moysa: 
As I mentioned at the outset, episodes of the Beyond Hourly Podcast can be found on our website, www.omnibridgeway.com. It can also be found on iTunes, Spotify, and wherever else you get your podcasts. Please subscribe and leave us reviews. You can also access a transcript of this podcast on our website.

Please feel free to follow up with me. Geoff Moysa at [email protected] for any feedback, ideas, or insights you have on topics you think we should cover in the future.

We'll be back soon with another episode. And until then, thanks for listening.