Joint venture farm-in agreements can be a useful way for mining companies (and in particular junior miners) to get exposure to, prove up and ultimately develop what may be considered non-core assets or low priority exploration projects of larger mining companies.
The basic foundation for the agreement is the conditional grant of an ownership interest in the principal mining company’s project, subject to the farm-in party meeting certain expenditure commitments over an agreed period of time (effectively a way for the principal mining company to transfer the obligation to keep the tenements in good standing to the farm in party, whilst at the same time maintaining an interest in the project and exposure to any exploration successes).
As with any joint venture agreement, careful consideration of all possible outcomes (the “what ifs?”) is required during the negotiation phase, whether on the side of the farm-in/earn-in party or the principal mining company (e.g. the owner of the project/asset the farm-in party is seeking to “farm-in” to).
When negotiating/entering into a contractual agreement with a farm-in party, principal mining companies can be promised the world but the reality can be much different – particularly in a cyclical industry like mining where raising capital can have many challenges.
Depending on the nature of the asset or project, farm-in parties keen to get their foot in the door and build their portfolio of assets, may offer attractive deposits and minimum expenditure commitments (e.g. $4m over 4 years, with no less than $500,000 in any particular year).
But what happens if the farm in party fails to meet its expenditure commitments as promised, loses interest in the project or shifts its focus to other projects, and the principal mining company is left ‘holding the baby’ with tenements now under threat of relinquishment due to failure to meet expenditure commitments?
There are various contractual protections available for principal mining companies who farm-out assets which can be incorporated into joint venture and farm-in agreements. Whilst on the other side of the fence, the agreement needs to be carefully crafted to allow sufficient flexibility for the farm-in party who may be grappling with financing risk/uncertainties around financing.
Of importance is the ability for the principal mining company to terminate the joint venture farm-in agreement in the event of breach and ideally retain ownership of any mining information that is available/has been produced (e.g. the data/results of any geological surveys and the like).
If a principal mining company has been let down by a farm-in party and is unable to easily terminate the agreement pursuant to the contract, the mining company would be at risk of tenement forfeiture and denied the ability to seek out offers from other potential joint venture farm-in partners.
From the perspective of the farm in party – overly rigid agreements can create issues and there needs to be appropriate flexibility. For example, any over expenditure in previous years of the farm-in period could be considered in/put towards years where the earn-in party has underspent.
Marshall Lawyers WA is experienced in negotiating and drafting joint venture farm in agreements (whether acting for the principal mining company or the farm-in party).
Please call Chris Marshall if you would like to discuss further.