Africa/April 19 2024
This article aims to provide a concise overview of the characteristics and risks of mining disputes in Africa in the context of the current investment, economic and political climate, in addition to an update on Africa-related mining arbitrations that have unfolded over the past year.
The year 2023 continued to see disruption to the global markets, especially in the energy and resources sector. The global supply chain was again at risk partly because of the Israeli–Palestinian conflict. Geopolitical tensions over natural resources, including on the African continent, have been compounded by soaring global demand for green transition minerals (eg, cobalt, copper, rare earths, nickel and lithium), and the past year has also seen developments on various mega iron ore project in parts of Africa, catalysing the next frontier of iron ore development.
In 2023, Fortescue Metals Group announced that its first product from its Belinga Iron Ore Project in Gabon was ready for shipment, while Rio Tinto announced funding and project advancement in the Simandou Iron Ore Project in Guinea. In February 2024, the Rio Tinto Board gave the go-ahead for the Simandou Iron Ore Project, targeting commencement of iron ore production as early as 2025. While this climate presents an opportunity for foreign investments and economic growth across many African states, it is likely to increase, at the same time, the potential for disputes.
The likelihood of resource-related disputes is also heightened owing to certain factors that – without being Africa-specific – are often prevalent in resource-rich African countries. Mining investments and projects in Africa are sensitive to political risk, which commonly manifests itself in the form of government interference owing to a climate of political instability (at times resulting in military coups), lack of consistent governance, and limited infrastructure and public services. A corollary to Africa’s structural and political challenges is exposure to security threats, ranging from trespass by artisanal miners to attacks by military or paramilitary groups.
This article outlines several options available to investors operating in the African mining industry to mitigate these investment risks, including the use of stabilisation and investment protection provisions in long-term host state agreements.
Trends in African mining arbitrations in 2023
The past year saw a significant number of international arbitrations commencing at the International Centre for Settlement of Investment Disputes (ICSID): ICSID recorded 57 new cases in 2023. At ICSID, the proportion of new cases involving sub-Saharan Africa remained steady at 14 per cent of the centre’s overall caseload, while the oil, gas and mining sector remained the largest sector, accounting for 24 per cent of new cases. During 2023, seven new ICSID cases were launched against sub-Saharan African states, and one case was commenced against a North African State. Of these new ICSID cases, only one case concerned a mining project.
Several other case developments are particularly noteworthy:
- In July 2023, the arbitral tribunal in Nachingwea v Tanzania issued its award concerning the unlawful expropriation of the Nkata nickel Project in Tanzania. The decision is one of the first public awards where an arbitral tribunal adopted a damages assessment using a prospectivity enhancement multiplier (PEM). The PEM valuation methodology applies a multiplier to the existing expenditure as a method of the perceived return on the amounts invested. The claimants were awarded losses of US$76.7 million, excluding interest and costs. As a result of this decision, a potential increase in claimants seeking damages on a PEM basis may be expected. Since the award was issued in July 2023, Tanzania has sought to annul the award.
- In October 2023, the tribunal in Mauritanian Copper v Mauritania rendered its award, which is not publicly available. The dispute concerned a contractual claim relating to a copper and gold mine in Mauritania, for which there are limited public details. Regardless of the outcome, this arbitration serves as an important reminder of the power of agreeing ICSID arbitration in contracts with host governments (as opposed to relying solely on the investment treaties network to access investment arbitration, insofar as these treaties are not always available or suitable depending on the investment structure).
- In early 2024, a UK company commenced an ICSID arbitration against Mozambique under the Mozambique–UK bilateral investment treaty (BIT). The arbitration concerns the alleged expropriation of a mining concession, which has been the subject of previous legal proceedings.
Finally, with debt levels already at crippling heights for many African states, the prospect of an award ordering the payment of damages to an investor may be leading some states towards faster settlement of their disputes. For example, in 2022, a number of mining and natural resource-related arbitrations were discontinued under Rules 43(1) and 44 of the ICSID Arbitration Rules:
- Kansanshi Mining v Zambia was discontinued in September 2023 under Rule 43(1); and
- Winshear Gold v Tanzania was discontinued in November 2023 under Rule 43(1).
In October 2023, Winshear Gold and Tanzania agreed to settle their dispute for US$30 million. This settlement was achieved shortly after Tanzania received an unfavourable award in Nachingwea v Tanzania in July 2023.
By way of comparison, there were six ICSID arbitrations discontinued in 2022 but only two in 2023. Such a high number of cases discontinued early (presumably as a result of settlement) denoted the continuous appetite of many African governments for negotiated and mediated settlement outcomes (or something in between), which is at odds with the hard line often taken by investor-state dispute settlement respondent states in other parts of the world.
Impact of Israeli–Palestine conflict on African mining disputes
Shortly after the Israeli-Palestine conflict commenced in early October 2023, which has continued with increasing severity since, a ‘dual shock’ to the global commodity market was anticipated.[14] As anticipated by the World Bank, however, the effects of the Israeli–Palestine conflict on the price of oil up to this point have generally been muted. Nevertheless, if the conflict escalates or spreads to nearby oil states, there could be substantial consequences for the global economy. Some of these would likely include:
- disruption to global supply chain: Israel is an important trade centre in the Middle East, and escalations in the conflict can cause negative impacts on trade networks and the commodity market;
- disruption to global potash supply: Israel is a major global exporter of potash, accounting for 8 per cent of the global potash market. Disruption in this market is enough to impact the global fertilizer market, with knock-on effects on food costs;
- disruption to global oil supply: given the proximity to major sources of global oil supply, the conflict could result in disruption to oil production, and consequential increases in the price of oil; and
- disruption to natural gas supplies: Israel has significant natural gas fields in the Mediterranean, and, if the conflict escalates, it could lead to disruption in gas production and supply.
As part of its assessment of the Israeli–Palestine conflict, the World Bank notes that the behaviour in certain commodities, such as gold, often indicates warning signs on market outlook. The World Bank report explains that gold prices have a unique relationship to geopolitical concerns: they rise in periods of conflict and uncertainty, often signalling a general erosion of investor confidence. Since the commencement of the conflict, the price of gold has increased from a low US$1,830 at the beginning of October 2023 to US$2,130 in March 2024.
If the conflict continues unresolved or escalates, it is expected that any increased pressure on global trade, the cost of energy and the cost of food will exacerbate existing tension and stability concerns in Africa. Under these exacerbated conditions, the overall risk for mining projects across Africa will likewise increase.
Impact of Russia–Ukraine war on African mining disputes
In 2022, the Russia–Ukraine war commenced, and it continues with no clear resolution in sight at the time of writing. In 2020, Russia was the second largest exporter of mineral products in the world, exporting US$166 billion in value – mainly to China (US$32.3 billion), the Netherlands (US$17.5 billion), Germany (US$9.72 billion), Italy (US$9.6 billion) and South Korea (US$9.22 billion). The wide-ranging international sanctions against Russia implemented throughout 2022 have triggered severe disruption in the raw commodities markets.
Further, with supply chain disruption felt during the covid-19 pandemic (and further exacerbated in the wake of the Russia–Ukraine war), governments and the natural resources industry more generally are turning to other supply chain sources to improve security, therefore shifting away from reliance on Russian raw materials.
Since sanctions were launched in 2022, Russian disclosure of imports and exports has been limited. In 2023, sources indicate that Russian reliance on Asian countries rose sharply in both import and export trade, demonstrating the impact of Western sanctions on Russia.
The Russia–Ukraine war had major consequences on the global economy. Food security has been identified as the major threat to African countries in 2022, particularly the supply and cost of wheat and sunflower. Prior to the Russia–Ukraine war, Russia was the largest supplier of wheat to Africa, while Ukraine was the third. Wheat prices are said to have increased by 64 per cent in Africa, with surging food prices having triggered protests in Niger and Mozambique.[19] It is anticipated that other countries, such as Cameroon, the Ivory Coast and Senegal, could also see internal turmoil as a result of food price hikes. As such, local unrest in response to food price hikes and increases in the cost of living could see general political risk increase in some countries and disruption to operations – each impacting existing and future mining projects.
It is unlikely that food security is going to improve in the medium term. In 2023, the UN Food and Agriculture Organization made the following projection:
[A]lmost 600 million people will be chronically undernourished in 2030. This is about 119 million more than in a scenario in which neither the pandemic nor the war in Ukraine had occurred, and around 23 million more than if the war in Ukraine had not happened.
Additionally, with Russia being the third-largest oil producer in the world, the disruption of oil prices in the global market has increased fuel prices and the cost of food production; however, Africa as a continent is generally less reliant on Russian fuel imports than other parts of the world: in 2019, only 2.9 per cent of all African imported fuel was sourced from Russia.
In addition to the Russia–Ukraine war’s general impact on inflation, mining projects in Africa are bound to see operations and transportation input costs dramatically increase as a result of higher energy prices. This will likely have the most impact on ore transportation. High energy costs, coupled with political instability, will likely disrupt exploration and early-stage projects, impacting their economic feasibility and delaying development. For some commodities, this will be counterbalanced with high commodity prices as a result of supply issues. By way of example, the price of iron ore has remained relatively high since the covid-19 pandemic. These developments could well lead to a new wave of disputes between foreign companies and their host governments.
More generally, long-term implications of the Russia–Ukraine war in Africa may include geopolitical realignment, social and economic instability and debt unsustainability as many countries and populations in Africa try to cope with the rising costs of living. There are justifiable concerns that the ongoing Russia–Ukraine war will continue to create further instability across the continent. For example, it has been reported that Russia is utilising political instability in Sahel and ‘exchanging muscle for minerals’. Similarly, the Russian group Wagner, despite the demise of its leader in 2023, is reported to maintain a presence in Mali in exchange for access to minerals. One security risk analyst expects that traditional Western stakeholders may ‘start being muscled out of an extractive sector that Russian companies are able to dominate’.
ESG, climate change and the energy transition
In December 2023, the United Nations Climate Change Conference 2023 (COP 28) (held in Dubai) saw further developments on climate change action. One of the major outcomes of COP 28 was the ‘UAE Consensus’, under which parties agreed, among other things, a global ‘transition away from fossil fuels in energy systems, in a just, orderly, and equitable manner, accelerating action in this critical decade, to achieve net zero by 2050 in keeping with the science’. This agreement – one of the first to transition away from fossil fuels – was directly referenced in a COP agreement and marks a new phase for states, including those in Africa to grapple with.
At COP 27, a historic decision had been taken to establish an international fund for responding to loss and damage suffered by vulnerable countries arising from the consequences of climate change. It is often referred to as the ‘loss and damage fund’. After multiple workshops in 2023 to develop the fund, an agreement was reached at COP 28 to operationalise it, and over US$700 million has already been contributed.
As discussed in the previous edition of this article, further developments on the phasing out of fossil fuels were expected. The agreement to phase out fossil fuels, although the agreement calls for this to take place in a ‘just, orderly, and equitable manner’, would seem to be in tension with mining operations in developing markets, particularly the extraction and beneficiation of technology metals required for renewal energy.
This tension arises owing to multiple reasons, including (1) the relative lower cost of fossil fuel energy sources compared to other energy sources and (2) the opportunity for developing countries to economically benefit from the extraction of fossil fuels. The technological revolution required to address climate change presents significant opportunities, particularly for states endowed with the natural resources used in the production of these technologies, including cobalt, copper, rare earths, graphite, nickel bauxite and lithium.
In mid-2023, the US Department of Energy released its ‘Critical Minerals Assessment’, evaluating supply risk and the importance of minerals. The report made a number of findings regarding how these minerals are, or will become, critical and near critical in the short and medium terms. It identified ‘dysprosium, neodymium, gallium, graphite, cobalt, terbium, and iridium, as critical in the short term’ owing to their applications in magnets, batteries and fuel power cells, among other things. From 2025 to 2035, it anticipates the following:
[T]he importance and supply risk scores for certain materials [will] shift. Specifically, nickel, platinum, magnesium, SiC, and praseodymium [will] become critical, primarily due to their roles in batteries and vehicle light weighting. Aluminum, copper, and silicon [will] become near critical in the medium term due to increased demand in solar energy technologies, global electrification, and vehicle light weighting.
Various African states have significant potential in relation to some of these minerals: the Democratic Republic of the Congo (DRC) is home to the largest reserves of cobalt, Guinea has the world’s largest reserves of high-grade bauxite, and Zimbabwe, Namibia, Ghana, the DRC and Mali have some of the largest reserves of lithium. Significant copper reserves are located in the DRC, Zambia, South Africa and Namibia, and rare earth deposits have considerable potential in Madagascar, Malawi, Kenya, Namibia, Mozambique, Tanzania, Zambia and Burundi.
However, the race for these resources must be tempered by growing consideration of the social and human rights impact of undertaking new mining operations and closing existing fossil fuel operations, including for the purpose of advancing the green transition. This explains the holistic approach to environmental, social and governance (ESG) issues.
All companies, not just those operating in Africa, are required to show that they comply with high standards of ESG. This broad and encompassing term has risen fast to the top of boardroom agendas, requiring policies and frameworks to address all aspects of ESG in companies’ operations, including climate change, sustainability and human rights-related risks.
This is particularly the case in the context of mining investments in Africa, in part because of the specific risks and characteristics outlined in this article. Stakeholders increasingly demand effective actions and heightened levels of transparency in relation to ESG issues, and mining investors seeking finance are increasingly required to demonstrate their ESG credentials. The mining industry is arguably the most exposed to ESG risks, with shareholder activism and participation by non-governmental organisations placing the sector under intensive focus.
Particular emphasis is being placed on mining operations in Africa because of a poor historical track record by some foreign companies. For many African states, the harmful actions of some foreign investors in the past justify a focus on compliance with local laws and, increasingly, ESG issues, including international environmental and human rights standards. A failure to comply with these laws and standards may result in claims flowing from the termination of contracts or exploitation of rights by states, as well as in counterclaims being made by states against investors.
Mining investors must be ready to demonstrate their efforts in compliance with local laws and regulations, socio-environmental standards and business human rights principles. This is particularly true in the context of investor-state disputes concerning natural resources projects located in emerging economies, where respondent states and sometimes third parties, through amicus curiae submissions, will increasingly question claimants’ compliance with their legal obligations on an ESG front.
Similarly, many new generation BITs and free trade agreements contain express provisions reserving states’ rights to regulate to protect public welfare objectives, such as public health, safety and the environment – much akin to similar carve-outs in the context of World Trade Organization agreements.
It is, therefore, likely that ESG-related issues will be an increasingly prominent feature in mining arbitrations in Africa, driven by increasing references to the protection of environmental, social and public health objectives in both contractual arrangements and investment treaties. Foreign investors are usually obliged to comply with local laws as a condition of their concession, as a term in a host state agreement (where there is one) or even as a gateway requirement to qualify as a covered investment under some investment treaties. Breaches of these obligations may result in claims against the investor or counterclaims by the state. In the context of investment treaty arbitration, the plea of illegality, namely that the investor has failed to comply with local laws, is often pleaded by states ‘as a question of admissibility or a question on the merits of the case’.[35]
Security issues and IHL and the impact on mining disputes
Security issues and international humanitarian law (IHL) are other issues relevant to the African mining industry. There were two coups in Africa in 2023,[36] and two other coup attempts across Africa.[37] In 2022, there were two coups in Africa,[38] along with other coup attempts. This is consistent with coups in previous years,[39] and they took place across what some refer to as the ‘coup belt’ spanning West and Central Africa.[40]
The year 2024 is not expected to be any quieter on the political front, with no less than 21 elections set to occur across African states in 2024, for heads of state, governments and national legislatures.[41] These elections and their results may well prove to be sources of unrest. South Africa in particular has been identified as an area where tensions are likely to occur.[42]
One of the elections due to take place in 2024 was the presidential election in Senegal in February 2024; however, the Senegalese president postponed the presidential election by 10 months, to 15 December 2024 through a contentious bill extending his tenure.[43] This move was met with violent protests and strikes in the weeks that followed, with analysts expressing concern for stability in Senegal. On 7 March 2024, President Macky Sall dissolved the government, named a new prime minister and called in the end for the presidential election to be held on 24 March 2024.[44] This sequence alone highlights the heightened political instability affecting countries in the region otherwise traditionally regarded as (relatively) stable.
Compounding on the political instability, the economic disruption caused by covid-19, estimated to have caused a loss of output of between US$37 billion and US$79 billion in Africa alone, appears to have increased tensions in many African states as more people have been plunged into poverty than ever before.[45] The emergence of the Russian–Ukraine war in 2022, followed by the Israeli–Palestine conflict in 2023, has hindered economic recovery from the pandemic, particularly in Africa. These two geopolitical events have had significant consequences in Africa, including regarding food security and energy prices. As a consequence, some African states have already seen unrest, including Niger and Mozambique.[46] Further unrest is expected over the coming year in other African states, which may disrupt operations of producing mines and may increase political risk for projects seeking development finance.
From an arbitration perspective, in countries where there is armed conflict, host states generally have a duty to protect the physical integrity and private property of their residents and investors, although this may be difficult to achieve in remote or dangerous areas. Mining companies may rely on relevant provisions of their mining concessions or conventions to secure the unimpeded enjoyment of their mining rights.
Foreign investors may also rely on the application of the fair and equitable treatment and full protection and security standards, which are present in most international investment agreements currently in force. Full protection and security has been interpreted to mean that the state is obliged to take ‘active measures to protect the investment from adverse effects’ that ‘may stem from private parties’, including demonstrators and armed forces.[47] States have been held liable for failing to protect investors and their investments against private violence, such as through the failure of police to protect an investor’s property from occupation and to respond adequately to violent incidents. A series of arbitral awards illustrates the application of full protection and security of investments in Africa.[48]
Another recurring security issue for large-scale mining companies concerns increasing encounters with unauthorised artisanal and small-scale miners in areas where they hold exclusive mining or access rights. While artisanal mining can help create employment in underdeveloped areas and finance development infrastructure in local communities, it is often associated with poor health and safety conditions and may entail negative environmental and social consequences; therefore, artisanal mining may create direct safety risks for local populations and large-scale mining companies, which run the risk of being blamed for the damage done by these unlicensed operators.
The presence of unauthorised (and often inadequately equipped) artisanal miners on a large-scale mining site creates a substantial risk of injury for trespassers and for legitimate site users. Moreover, the activity of artisanal miners may interfere with ongoing exploration and production works, in part by creating hazardous excavations or using inefficient processes that prevent the future recovery of valuable minerals left behind. In addition, artisanal miners often use toxic substances and processes to extract and treat minerals without taking adequate protection measures. The resulting environmental contamination may endanger local populations, impair large-scale mining operations and result in substantial liability for the large-scale mining company holding mineral rights over the area.
Finally, artisanal mining activity results in the production of non-renewable mineral resources by a third party who is not the rightful permit holder, therefore depriving the permit holder of its economic rights over these resources. This competition over the same resources – and the large-scale miners’ efforts to keep artisanal miners from trespassing – may result in conflicts between the large-scale operators and artisanal miners (who may be armed or supported by armed groups). This risk is particularly high in areas where government presence and economic opportunities are limited.
Continuous impact of Chinese investments
In the background of these recent developments, China’s presence in Africa remains another source of influence on African mining projects and the disputes arising therefrom.
For some time now, China has been Africa’s largest trading partner, with Chinese foreign direct investment to Africa increasing markedly from around US$75 million in 2003 to US$4.2 billion in 2020.[49] According to the Center for Global Development, China’s development banks (Exim Bank of China and China Development Bank) provided US$23 billion in financing for infrastructure projects in sub-Saharan Africa between 2007 and 2020, which is double the amount lent by banks in the US, Germany, Japan and France combined.[50] Interestingly, for the first time, China’s investment in renewables infrastructure (including thermal solar, hydro, wind, biomass, geothermal and energy storage) exceeded its investment in fossil fuel infrastructure.[51]
Reports indicate that, in recent years, project lending from Chinese policy banks, such as Export-Import Bank of China and China Development Bank, has tailed off, with increased lending from commercial Chinese banks.[52] The overall trend of reduced financing from China will likely negatively affect African trading partners over the medium term.[53]
In addition to the above lending trends, alternative forms of Chinese influence observed across Africa continue. For example, in October 2023, China gifted Zimbabwe a new US$200 million parliamentary building financed and constructed by the Chinese government.[54] This is reported as a wider trend of gifting across Africa, including parliamentary buildings in Mozambique, Lesotho and Guinea-Bissau.[55] Accordingly, a high degree of Chinese influence is expected to continue in Africa.
While the West has lagged significantly behind China with respect to new investments in Africa in recent years, the United States may be looking to reinvigorate its commitment to the continent, with President Biden’s election statement that he will ‘renew the United States’ mutually respectful engagement toward Africa’, including by ‘restoring and reinvigorating diplomatic relations with African governments and regional institutions, including the African Union’;[56] however, the extent to which US re-engagement will have any impact on China’s standing as the largest investor in Africa remains to be seen.
Chinese investment in cobalt in the DRC is a good example of Chinese power and influence in Africa and on the critical mineral supply chain. In 2023, China’s CMOC Group overtook Glencore to become the world’s largest producer of cobalt, increasing production by 174 per cent year-on-year to 55,526 tonnes, representing one quarter of global demand.[57] In 2023, there was an estimated 12,500 tonnes of surplus cobalt produced, with prices falling from US$40 per pound in May 2022 to US$13; however, CMOC plans to lift cobalt output further, irrespective of current supply demands and cobalt prices, putting other cobalt projects at risk of becoming uneconomic. Intense production expansion is expected to continue from Chinese-owned mining projects in Africa.
For low- and middle-income African countries, repayment of the vast loans provided by China are becoming a significant problem. Chinese debt repayment issues have arisen in Ethiopia, Kenya, Uganda and Zambia.[58] In these circumstances, governments may be forced to turn to alternative ways to repay their debts, such as through granting rights and concessions over valuable resource assets, possibly including those committed to foreign investors.
The inability to repay debt will likely reinforce China’s economic influence and control over vast reserves of key mineral resources on the African continent. This may include securing access to minerals and metals necessary for the transition to renewable energy, including cobalt, copper, rare earths, graphite, nickel, bauxite and lithium. The desire to shore up supply of these critical resources will undoubtedly lead to significant investment competition in states endowed with them, which in turn will likely drive disputes both among private investors and between investors and the host state (especially in circumstances where the host state would grant foreign-owned mining projects on their territory to China-affiliated entities by way of debt repayment in kind).
One notable characteristic of Sino-African mining contracts over the past decade is the inclusion of commitments to develop or contribute to infrastructure development, as some agreements between African states and China or Chinese state-owned companies contemplate the provision of infrastructure as a means of payment for the resource. These arrangements increase the potential for disputes between foreign investors and host states that can arise not only from the development and operation of mining projects but also from the construction and operation of large-scale infrastructure projects. The interconnection between access to mineral resources and infrastructure investments could also result in situations where host governments decide to terminate mining rights as a result of an investor’s failure to deliver on its infrastructure commitments.
Resource nationalism
Political risk remains another great challenge faced by investors in the mining industry. As is evident from the most recent trends and developments reported above, this is particularly the case in African countries where political instability, the lack of strong governance and political structures, as well as more limited administration and public services, may adversely impact the development and operation of mining projects. Analysing the period from 2022 to 2023, Verisk Maplecroft identified significant deterioration in their resource nationalism index score for Cameroon, Burundi, Guinea, Congo and Zimbabwe.[59]
Political risk most often manifests itself in executive and legislative measures aimed at increasing government control over the development of natural resources in a manner that disregards the rights of existing concession holders – a policy phenomenon often described as ‘resource nationalism’. This is not to be confused with the legitimate aims of states seeking to achieve the highest return from their natural resources so that the people for which governments are responsible can enjoy the greatest benefit from their nation’s natural endowment. Rather, disputes arise when measures are taken against investors that are unlawful in that they are discriminatory, not in the public interest, not carried out under the due process of law and not accompanied by fair compensation (ie, the cumulative conditions of lawful expropriation under public international law).
Resource nationalism in sub-Saharan Africa is arguably closely connected to its history of colonisation and decolonisation. While Western powers wished to retain control of natural resources post-decolonisation, buoyed by their access to specialised workforces and their ownership of hydrocarbons and mining projects, the newly independent former colonies wished to regain control of their own resources.
In 1962, the United Nations General Assembly adopted Resolution 1803 (XVII) on Permanent Sovereignty over Natural Resources (Resolution 1803). Resolution 1803 consecrates many of the host government’s rights (including nationalisation rights and rights regarding the expropriation of natural resources on its territory) while also providing guarantees and compensation for foreign investors owning natural resource projects that are affected by state measures. In this sense, some commentators consider Resolution 1803 to be a key predecessor to the system of investment protection based on international investment agreements in force today.
A resurgence of resource nationalism may be driven by increases in commodity prices, fuelled by a combination of continued increase in demand for raw materials and further disruption in global raw mineral supply over the past few years, particularly in respect of gold and iron ore. The increasing demand for green minerals is also bound to drive up the prices for these commodities, prompting states to take measures designed to enhance the state’s share. One significant method by which this can be achieved is the enactment of fiscal legislation increasing the amounts payable to the state (in the form of taxes and royalties). Mining laws enacted over the past few years by Mozambique, Zambia and Ghana all contain a series of measures in furtherance of that objective.
In this climate of increasing resource nationalism, the financial pressure is being felt by (or transferred to) investors, as an increasing number of new state measures affect the profitability and operability of mining projects. From an investor perspective, unforeseen restrictive measures imposed by governments may result in a desire to suspend projects, restrict production or find some other way to protect their investments. Further, given mining companies’ general reliance on debt financing, investors may increasingly be forced to take whatever measures they can to meet their repayment obligations.
In this context, impacted investors are likely to challenge state measures that they view as confiscatory, punitive, or arbitrarily or discriminatorily imposed. Challenges may be based on contracts or national legislation providing for arbitration as the dispute mechanism or on investor-state dispute settlement provisions in international investment agreements, such as BITs, linking African host states with partner states around the globe. There are now many examples of African states having taken these measures over the past few years, including the DRC, Sierra Leone, Mali, Madagascar and the Ivory Coast.
Many of these measures are also aimed at increasing the amount of taxes and royalties accruing to the state from mining projects, and these fiscal measures have also been the source of disputes. Although these risks may seem remote at times, in the beginning of 2023, Ghana’s tax agency levied large tax bills against a number of key companies, including MTN Group, Tullow Oil and Gold Fields. Ghana’s actions demonstrate the real risk of changes in fiscal regimes, particularly in circumstances of tough economic times.
Host governments may also impose other measures on mining projects, such as imposing levies in the export of raw ore or mandating in-country beneficiation. For example, in late 2022, Zimbabwe announced a prohibition on exports of raw lithium from its mines.] This trend of requiring in-country beneficiation is expected to be common, particularly with new lithium extraction sectors.
Managing political risk beyond investment treaties
Stabilisation of the applicable legal and regulatory framework is increasingly seen as essential for large-scale mining projects, given the often-lengthy time frames involved from resource definition to exploitation. In this respect, mining companies are drawing on the experience of the international oil and gas industry, where businesses have long sought to manage the risks of adverse legislative change by including stabilisation clauses and choices of international law in their long-term agreements with host governments. In the African mining industry, they usually take the form of mining licences and conventions required by law; however, these agreements may also be concluded on an ad hoc – and even sui generis – basis, in which case they are often referred to (officially or unofficially) as host government or state agreements, or development agreements.
Besides the stabilisation of laws, investors should seek to build into these agreements the substantive (and substantial) protections typically found in investment treaties, including protection against expropriation, fair and equitable treatment, full protection and security, and most-favoured nation treatment. These fundamental protections, coupled with an effective international arbitration clause, can help protect a mining project from adverse and unlawful measures.
During the negotiation of a host government or state or development agreement, securing the most favourable fiscal terms must be balanced against securing sufficient investment protection and international arbitration. This trade-off is even more relevant in countries that do not have a wide-ranging BIT programme. Acquiring these investment protections and the right to resolve disputes in international arbitration can be the difference between life and death for a company when things go wrong. For countries with applicable BIT protection, companies may – and, to the extent possible, should strive to – couple a host state agreement with any BIT available to provide a multilayered investment protection structure. This is because, no matter how flexible and protective, host-government or state and development agreements remain contracts that are almost invariably subject to the vagaries of domestic law, which the host-state has the unilateral power to amend, including in such a way as to render the agreement illegal or null and void.
As discussed above, 21 elections are due to be held across Africa in 2024. Companies with mining projects looking at the next stage of development should consider negotiating a host state or development agreement with their host government that is balanced and fair. Obtaining investment protection that is balanced, fair and transparent can significantly improve these investors’ chance of withstanding political swings and election cycles.
