Mining Projects: Breakfast for the Mind


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In this Dentons Mining Breakfast series presentation, Leanne Krawchuk, Colleen Cebuliak, Shauna Finlay and Don Sommerfeldt discuss the following issues:

• Is it working? Review of the 2012 changes to the Federal Assessment and Fisheries Legislation
• Financing strategies for mining projects: to dilute, leverage up, sell, stream or joint venture?
• What’s special about “Special Committees”?
• Mining Taxation: tips and update

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Mining Projects: Breakfast for the Mind

  1. 1. Mining Projects Breakfast for the Mind November 21, 2013
  2. 2. Is it Working? Review of the 2012 Changes to the Federal Environment Assessment and Fisheries Legislation Shauna Finlay Partner 2
  3. 3. Canada’s Economic Action Plan – 2012 • Components included: • Amending Mining Regulations • Metal Mining Effluent Regulations • Responsible Resource Development • Enforcement change • Streamline environmental assessment process • Regulatory certainty and improvement of timelines • Supporting Responsible Energy Development • Transport issues • Action Plan objectives implemented in two pieces of legislation: • Jobs, Growth and Long-term Prosperity Act, S.C. 2012, c. 19 • assented to on June 29, 2012 • Jobs and Growth Act, 2012, S.C. 2012 c. 31 • assented to on December 14, 2012 3
  4. 4. Changes in response to a number of consistently made criticisms of Canada’s project approval regulatory regime. • Too costly, in part due to duplication between Provincial and Federal regimes • Delay, uncertainty, and high costs caused by the environmental assessment process • Use of environmental assessment process to debate and litigate broader policy determinations • These issues discouraging investment in Canada’s resource development industry 4
  5. 5. Canadian Environmental Assessment Act, 2012 • Project designation instead of “trigger” • Fewer federal environmental assessments due to more limited scope • Environmental assessment conditions will be enforceable • Focus on potential adverse effects within federal jurisdiction • i.e. fish, migratory birds, federal lands, effects that are interprovincial, effects on aboriginal peoples • Introduction of timelines within which environmental assessment must be completed • Provisions to substitute provincial environmental assessment process for federal environmental assessment process 5
  6. 6. Fisheries Act Changes • HADD power which had been principal triggering mechanism, revised • As of November 25, 2013, will focus on fish that are part of a commercial, recreational or aboriginal fishery or that support such fishery • Instead of “harm” being the threshold, “serious harm to fish” is threshold and is defined as “death of fish or any permanent alteration, or destruction of, fish habitat • Amendments to allow for broad based exemptions to the prohibition to deposit a deleterious substance • Duty to report occurrence that results in serious harm to fish • Minimum and maximum penalties 6
  7. 7. What has happened since 2012? CEAA • Two CEAA panel decisions have been issued since the enactment of CEAA 2012 • Jack Pine • Prosperity Mine • Agreement on equivalency of BC assessment process only agreement executed to date 7
  8. 8. CEAA cont’d • Have amendments to standing provisions changed participation in hearings? • Appears to be no • Application of “environmental effect” • Can take into account a change other “than those referred to in paragraphs 1(a) or (b) that may be caused to the environment and that is directly listed or necessarily incidental to a federal authority’s exercise of a power …” But the New Prosperity panel found such linkages and direct effects could be established due to the interacting components of the environment so this passage likely did not have the streamlining effect that was intended. • Enforceability of mitigation measures has become a bigger issue as adaptive management appears to be losing ground • Has timing improved? • Jury is still out on this issue but some early results look promising • Frontier Oil Sands Mine Project Environmental Assessment commenced January 19, 2012 and referred to Panel at the same time. Seems to be moving through process 8
  9. 9. Fisheries Act • Recently issued policy update and operational update make clear that there will be far less oversight and resources • Focus on project regulatory review, not enforcement • Progress on amendment of Mining Effluent Regulations 9
  10. 10. Conclusion • Major changes in 2012 to environmental regulatory regime for projects, a significant number of which are mines or resource extraction related projects. • We will continue to watch how effective these changes will be to achieving the objectives of timely, clear and responsible regulation 10
  11. 11. Financing Strategies for Mining Projects: To Dilute, Leverage Up, Sell, Stream or Joint Venture? Leanne Krawchuk Partner 11
  12. 12. Recent Trends • “As companies work through the impacts of rising costs and volatile markets, deal activity is expected to remain muted for the remainder of 2013. Expect to see more sales of noncore assets from the major mining companies, and more interest from sellers including state-owned enterprises (SOEs) and potentially private equity, which is showing an increasing interest in the sector given today’s lower valuations. Companies will also continue to get creative in how they fund the transactions through joint ventures and royalty and streaming agreements, for example, given the continued uncertainty in equity and debt markets.” -John Gravelle, PwC Global Mining Leader- “Deals in the Dumps”, Global Mining Deals Mid-Year Report, Sept. 2013 • “Mining acquisitions valued at less than $1 billion have slumped to an eight-year low as the industry’s largest players rein in spending after a drop in commodities prices…There are about 972 mining companies based in Canada that reported no revenue for the past 12 months, according to data compiled by Bloomberg.” -Bloomberg Businessweek – Oct. 15, 2013 12
  13. 13. Recent Trends • “This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year. That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining. We expect Resource Industries to be down close to 40% for the full year…We’re not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we’ll be ready to respond.” -Caterpillar Inc. (NYSE: CAT) Chairman and CEO Doug Oberhelman-Oct. 23, 2013 • “The metallurgical coal market is currently depressed but the Company does expect the market to rebound and fully recover over the next 12-18 months.” -Cardero Resource Corp. (TSX: CDU, NYSE: CDY) CEO Henk Van Alphen-Aug. 9, 2013 • “We have a very positive outlook on the low volatile metallurgical coal space and Corsa’s high quality coal reserves and mine development strategy fit well within that thesis.” -Quintana Energy Partners LP Managing Director George Dethlefson-Mar. 21, 2013. Media Release of Corsca Coal Corporation (TSX-V: CSO) 13
  14. 14. Recent Trends • “To have successfully closed this private placement during such challenging times for capital markets and the junior mining sector as a whole, is a testament to the quality of the Company’s mineral resource and confidence in management’s ability to put the mill into operation and resume operations.” - Jim Williams, CEO of Arian Silver Corporation • “When you are investing in an early stage company, the board and management are just as important, sometimes more important, than the quality of the assets themselves.” -Simon Gray, National Head of Energy and Resources, Grant Thornton Australia – Grant Thornton International Mining Report, 2013 14
  15. 15. Traditional Mine Project Financing Methods: • Equity Financing • Debt Financing • Joint Ventures • Offtake Agreements • Sale of Non-Core Assets/Non-Dilutive Cash 15
  16. 16. Alternate Mine Project Financing Methods: • Royalty Finance Agreements (2 subsets) • Production Royalty Payment Agreements (cash or in-kind) • Streaming Agreements 16
  17. 17. Traditional Mine Project Financing Methods: • The Equity Market Today:(The MiG Report September 2013 by TMX) • More difficult to attract investors in mining issuer private placements and very dilutive at record low prices (i.e. $0.02) • IPO mining activity on TSX and TSX-V is down from 2012 • TSX: 6 mining IPOs to September. 30, 2013 compared to 19 to September 30, 2012 • TSX-V: 48 mining IPOs to September 30, 2013 compared to 85 to September 30, 2012 • But: mining sector still highest (27.4%) of any sector: 54 out of 197 new listings at YTD Sept. 2013 (Compared to 104/270 as at Sept. 2012 (38.5%)) • But: of the TSX-V top 10 private placement financings for the month of September 2013, 6 (or 60%) were completed by mining issuers ($5 million to $19 million) • And: 6 (or 60%) of the top 10 private placement financings for TSX-V for Q3 in 2013 were mining issuers ranging from $10 million to $31 million • And: as at YTD September 30, 2013, both on the TSX-V and TSX, the mining sector had the highest volume traded (billions of shares) 15.49 (TSX-V) and 22.65 (TSX) • And: mining issuers represent 44% of the total number of listed issuers on TSX and TSX-V combined as at Sept. 30, 2013 but only 11% ($251, 568 (in millions)) of their combined total market cap 17
  18. 18. Traditional Mine Project Financing Methods (cont’d) • However, of the TSX Top 10 private placement financings by month-end and for Q3 (both Sept 2013), no mining issuer made either list • Focus by some major mining companies is to sell off non-core assets notwithstanding lower valuations in order to enhance shareholder value and increase share price in long-term • Unlike the juniors who may need cash for day-to-day working capital, the majors are not forced to heavily dilute their existing shareholder base if they have non-core assets that can be sold 18
  19. 19. Equity-Recent Examples: i) Financial Hardship/Delisted from TSX • Sept 5, 2013 Thundermin Resources Inc. (TSX-V:THR) Private Placement • Junior mining company involved in exploration for base metal and gold deposits in Canada • Non-brokered private placement offering of units at price of $0.02/unit for gross proceeds of $220,000 • 1 unit=1 share + 1 warrant to purchase share at $0.04 for 2 years • Sole subscribers under the private placement expected to be insiders • Placement made in reliance on to TSX “financial hardship” exemption from requirement to obtain shareholder approval • Corporation is in serious financial difficulty and financial statements include a “growing concern” note. Proceeds to be used to address immediate liquidity concerns and for general corporate purposes • Lack of alternate financing arrangements • Common shares delisted from TSX on Sept. 12, 2013 as unable to meet continued listing requirements. Shares have now commenced trading on the TSX-V as of November 8, 2013 19
  20. 20. Equity-Recent Examples: ii) $0.15 IPOs/Gross Proceeds <$1 Million • June 28, 2013-Common shares of Canadian Metals Inc. (CNSX:CME) approved for listing on the CNSX • Montreal-based mining exploration and development company with Quebec gold project • CNSX listing follows an IPO of 5.399 million units at price of $0.15/unit for gross proceeds of $810,000 • 1 unit=1common share +1 warrant to purchase common share at $0.25 • June 18, 2013-Common shares of Plate Resources Inc. to trade on TSX-Venture Exchange • Vancouver-based mineral exploration company with a B.C. copper-tungsten property as its principal project • Listing follows an IPO of 5 million common shares at $0.15/share for gross proceeds of $750,000 20
  21. 21. Debt Financing for Mining Projects: Conventional • Common for a syndicate/consortium to extend credit for mine construction operations, expansions or equipment purchase • Non-dilutive and finite duration • Can be project-specific or as a credit facility for entire operations • Restrictive covenants, financial covenants, and security are significant and may include affiliate company guarantees and lender pays close attention to project • Not typically available for junior exploration companies – lack of adequate technical reports or feasibility studies if no proven resources/no track record • Debt repayment schedules often prohibitive for junior exploration companies to meet • However, now seeing funding on basis of preliminary economic assessment stage of development 21
  22. 22. Debt Financing for Mining Projects: Private Placement of Convertible Debentures or Notes • Common form of private placements by listed issuers; potentially dilutive • Could have an equity component like a warrant • If listed, review Exchange policy restrictions on equity issuance upon conversion of any convertible debt • Often an interest bump at varying intervals of convertible debt • Fewer covenants than with conventional lender and typically less ongoing reporting • Security may or may not be required by lender • Debt may be redeemable • Change of control clause may trigger a put right by lender at premium (i.e. 110%) of principal amount 22
  23. 23. Debt Financing for Mining Projects: Private Placement of Convertible Debentures or Notes (Cont’d) • If full exercise of equity component, like warrants, would result in a change of control, may require shareholder approval to be obtained before warrants can be exercised • Lenders may have right to participant in all future equity financings 23
  24. 24. Debt – Recent Examples-Private Placements • Aug. 9, 2013 Cardero Resource Corp. (TSX:CDU) Secured Note Financing • Cardero’s flagship asset is the Carbon Creek Metallurgical Coal Deposit in B.C. • USD$5.7 million private placement of senior secured notes • Notes secured by general security agreement over the assets of Cardero and a specific pledge of shares of Cardero Coal Ltd. and a corporate guarantee also given by Cardero Coal Ltd. • USD$3.7 million of the Notes due on Dec. 31, 2013, and USD$2 million of the Notes due on August 8, 2014 with interest at 10% per annum, payable quarterly • As additional consideration, the lenders were issued transferrable warrants to purchase 28, 359, 066 common shares at $0.095/share, with a 7 year term 24
  25. 25. Debt – Recent Examples-Private Placements • Sept. 2, 2013 Arian Silver Corporation (TSX-V:ADQ, and AIM: AGQ) Private Placement • London-based silver exploration, development and production company with a focus on projects in the silver belt of Mexico • USD$15,585,000 private placement debt financing consisting of senior secured convertible note to one lender • Note will mature at a premium of 5% if not converted before Aug. 29, 2014. Up to that time, convertible at the option of the holder, Platinum Long Term Growth VIII, LLC, to common shares in the company at pre-consolidation price of CDN$0.11/share and post-consolidation price of CDN$1.10/share. • At closing, the company prepaid the full interest of 14% • Note is secured on substantially all of the company’s and its subsidiaries’ assets • 96% can be converted at the conversion price and the remaining 4% at the TSX-V closing price 25
  26. 26. Debt – Recent Examples-Private Placements and Coal Acquisition • March 21, 2013 Corsa Coal Corp. (TSX-V:CSO) raises US$40 million • Corsa’s business is the mining, processing and selling of metallurgical coal in Pennsylvania • USD$10 million private placement cash financing by issuing CDN$10.2 million convertible note to Quintana Energy Partners LP (and its affiliated funds) convertible into Corsa common shares at CDN$0.17 share for a total of approximately 60.2 million common shares; proceeds for working capital • Note bears interest at 8% annually, payable semi-annually, and is unsecured and subordinate • Quintana also agreed to purchase common shares of Corsa at CDN$0.17/share for aggregate proceeds of US$30 million under an Investment Agreement; proceeds to repay a credit facility • In connection with the transactions, Corsa will acquire Kopper Glo Investment LLC, a company with metallurgical coal mines in Clairfield, Tennessee 26
  27. 27. Joint Ventures • Attractive for junior mining companies who need access to a more senior, wellfinanced strategic partner • Attractive for senior mining companies looking for juniors with potentially very valuable underdeveloped mining assets • May result from an existing option agreement or co-operation agreement • The junior benefits from the cash flow injection, and technical expertise and track record of the senior JV partner and its contacts and reputation • Senior JV partner may control the project through management committee representatives or act as operator, particularly if it has the technical expertise/people skills needed to advance the project • JV can either be through (i) an incorporated entity of which the two JV partners are actually shareholders  a unanimous shareholder agreement is necessary OR (ii) unincorporated and created solely by the way of contract  the joint venture agreement 27
  28. 28. Joint Ventures (Cont’d) • Dilution of the junior’s JV interest is a risk if it misses any required cash calls or otherwise triggers “an event of default” under the USA or JV AgreementsJunior can end up with only a production royalty • Better for junior to seek a more passive financier who may take a lower JV interest (less than 50%) but with future royalty or offtake rights 28
  29. 29. Joint Venture/Cooperation Agreement– Recent Examples • Aug. 26, 2013 International Enexco Ltd (TSX-V:IEC) Joint Venture with Denison Mines Corp. • A 1900 metre diamond drill program on the Bachman Lake uranium project in Saskatchewan has been started by the project operator, Denison • Pursuant to a Joint Venture Agreement, Enexco can earn a 20% interest in the Bachman Lake uranium project by funding $500,000 of exploration work by Dec 31, 2013. • Oct. 21, 2013 Solid Resources Ltd. (TSX-V:SRW) enters exclusive Cooperation Agreement with a Glencore Xstrata PLC subsidiary • Solid is a Canadian junior mining company focused in Spain on rare and industrial metals • Cooperation Agreement provides for joint due-diligence for Cehegin iron ore mine in Spain and provides for potential formation of JV development for Cehegin • Under a Venture Agreement, Glencore would be granted a 20% interest in the Cehegin project with Solid maintaining an 80% interest • Glencore to exclusively purchase all production • Agreement to jointly pursue third-party financing when required • Solid also issued to Glencore 12 million warrants to purchase common shares at $0.19/s until Oct. 18, 2014 and $0.26 from Oct. 19, 2014 to Oct.18, 2015 • The warrants only vest and are exercisable as to 50% on the signing of the Cooperation Agreement and as to 50% on Glencore contributing its share of costs for initial exploration and study phase of development 29
  30. 30. Joint Venture/Strategic Alliance – Recent Examples • Aug. 8, 2013 Duncan Park Holdings Corporation (TSX-V:DPH) enters JV with Sphere Resources Inc. • Duncan Park is a Toronto-based mineral exploration company exploring for gold and other precious metals in Ontario’s Red Lake gold mining district • JV deals with future exploration on the Dome property, with Duncan Park earning a 75% interest and Sphere retaining the balance • Duncan Park will be the operator of the project • JV was preceded by an Option Agreement which contemplated a future JV following a set earn-in date 30
  31. 31. Joint Venture – Recent Examples • July 16, 2013 Teck Resources Limited (TSX:TCK.A/TCK.B) JV with Copper Fox Metals Inc. regarding Schaft Creek property in Northern B.C. • Teck will hold a 75% interest and Copper Fox will hold 25% in this copper-gold exploration property • Under the JV Agreement, Teck will make an initial $20 million payment to Copper Fox and has committed to provide two additional $20 million payments, the first following a decision to bring the property into production and the second following the completion of the mine construction • Teck has also agreed to fund the first $60 million of costs of the JV prior to a production decision. If the costs exceed $60 million, Teck will fund Copper Fox’s 25% portion of the additional costs • The JV agreement replaces a 2002 option agreement between the parties 31
  32. 32. Offtake Agreements • Offtake Agreements require a producer to sell a specified quantity of mineral concentrate to a counterparty. • In many cases, offtake agreements function like any mineral purchase and sale contract, and occur at prevailing market prices and commercial terms • Offtake Agreement as Financing Strategy • Offtake partner may also function like a lender by investing in mine construction in exchange for a long-term supply contract • Lender’s bargaining position may allow it to obtain favorable terms • Having offtake agreements in place may enhance the likelihood of obtaining other financing by demonstrating the company’s ability to sell production from the mine 32
  33. 33. Sale of Non-Core Assets • Alternative way to raise non-dilutive cash when traditional financing sources are limited • Monetizing non-core assets may help a company increase its attractiveness to raise capital • Can also reduce a company’s debt and maintenance costs, and improve its balance sheet and shareholder returns • Provide more stability 33
  34. 34. Sale of Non-Core Assets-Recent Examples • Oct 24, 2013 Oremex Silver Inc. (TSX-V:OAG) grants option to First Majestic Silver Corp. (TSX:FR)(NYSE:AG) to acquire Oremex’s interest in non-core assets: Chalchichuites and Navidad mineral exploration properties • Involved an aggregate Option Payment of $1.5 million paid as to an initial $834,400 with the remainder to be paid in four annual installments • The non-dilutive cash allows the company to honour its interest payment obligations under outstanding debentures through to maturity and to focus on its flagship Tejamen silver deposit • “The Board of Oremex continues to execute its strategy of realizing financial value for the non-core assets within its silver portfolio that it has built over the past several years. In a volatile and uncertain market environment Oremex has now executed two significant transactions that will provide the company with a valuable measure of stability…Oremex continues to evaluate other opportunities to realize additional financial value for its noncore assets as it focuses on bringing the Tejamen deposit closer to feasibility through the successful resolution of surface access issues” -John Carlesso, Executive Chairman of Oremex Silver Inc. 34
  35. 35. Sale of Non-Core Assets-Recent Examples • Jul. 23, 2013 Barrick Gold Corporation (TSX:ABX, NYSE:ABX) enters agreement to divest Barrick Energy Inc. • Barrick will receive total consideration of approximately CDN$455 million, comprised of cash proceeds of CDN$405 million on closing, plus a gross overriding royalty on certain lands, the estimated value of which is approximately CDN$50 million • The transaction consists of: i) sale of certain assets to Venturion Oil Limited for CDN$59 million; (ii) the sale of certain assets to Whitecap Resources Inc. for CDN$174 million; and (iii) after giving effect to (i) and (ii), the sale of shares of Barrick Energy and its assets to Canadian Natural Resources Limited for CDN$173 million and the gross overriding royalty on certain lands • In connection with entering into these transactions, Barrick expects to recognize a loss of approximately $500 million in the second quarter, approximately $90 million of which relates to goodwill, representing the difference between the net proceeds and the carrying value of Barrick Energy as at June 30, 2013 • “As part of its disciplined capital allocation framework, Barrick is actively pursuing opportunities to optimize its portfolio, including through opportunities to divest certain noncore assets. The sale of Barrick Energy represents such a divestiture in this ongoing process” Barrick Gold Corporation News Release-Jul.23, 2013 35
  36. 36. Sale of Non-Core Assets-Recent Examples • Oct. 1, 2013 Barrick Gold Corporation (TSX:ABX, NYSE:ABX) completes divestiture of three mines in Western Australia to Gold Fields Limited • Assets sold for a total consideration of USD$300 million, subject to a closing adjustment deduction estimated at USD$30 million • The three mines produced an aggregate 452,000 ounces of gold in 2012 at all-in sustaining cost (AISC) of USD$1137 per ounce, while Barrick’s production guidance for 2013 is 7.9-7.4 million ounces at AISC of USD$900-975 per ounce • Gold Fields satisfied the purchase price by delivering 28.7 million of its common shares for half the consideration at a volume weighed average price of $4.70 per share • Proceeds to be used for general corporate purposes, including debt repayment • “The divestiture of Yilgarn South is part of Barrick’s ongoing portfolio optimization process to maximize free cash flow in line with the company’s disciplined capital allocation framework.” Barrick Gold Corporation News Release-Oct. 1, 2013 36
  37. 37. Royalty Finance Agreements • Attractive financing source to overcome funding gap from traditional sources • Financier provides a sum of money (lump-sum or installments) for mine exploration, development, construction or expansion in exchange for the right to all or a portion of one or more minerals produced from the mine. Advantages Disadvantages Non-dilutive to shareholders Non-production risk Avoids debt financing costs Commodity price risk Mining company can leverage proven reserves Long-term impact on market value and financing options for project Upside potential for financier Monetize by-products 37
  38. 38. Royalty Finance Agreements (2 subsets) 1. Production Royalty Payment Agreements • Financier provides one-time, up-front sum of money in exchange for the rights to receive a percentage of production(i.e. royalty) from the mine (cash or in-kind) 2. Metals Streaming Agreements • Long-term purchase and sale agreements • Financier provides a one-time, up-front payment or installment payments based on milestones to the miner, and the financier also agrees to purchase a percentage of the mine production (all or a portion) • Price to purchase production typically the lower of: • (a) the market price at the time of purchase, and • (b) a constant fixed price that is low in comparison to market prices prevailing at the time the streaming agreement is executed. • Non-production risk to financier • Financier realizes return on investment after “notional payment account” equals investment amount 38
  39. 39. Metal Stream Financing-Example • Sept 8, 2009 Silver Wheaton Corp. (TSX:SLW, NYSE:SLW) acquires 25% of life of mine Silver Production from Barrick Gold Corporation’s Pascua-Lama Project • Silver Wheaton will also receive 100% of silver production from three of Barrick’s currently producing mines from Sept. 1, 2009-Dec. 31, 2013 • Silver Wheaton paid Barrick total cash consideration of USD$625 million over three years as well as ongoing payments of the lesser of USD$3.90 (inflation adjusted) and the prevailing market price per ounce of silver delivered • Barrick provided Silver Wheaton with a completion guarantee requiring Barrick to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. During 2014-2015, Silver Wheaton is entitled to the silver production from the currently producing mines to the extent of any production shortfall at Pascua-Lama. • If Barrick fails to satisfy the completion guarantee, the agreement may be terminated by Silver Wheaton, which would then be entitled to a return of the USD$625 million (less credit for silver delivered to that point) • Barrick grants Silver Wheaton 5-year right of first refusal on further metal stream sales where more than 50% of the value is from silver 39
  40. 40. What's Special about “Special Committees”? Colleen Cebuliak Partner 40
  41. 41. Overview • Historical Context • When Should a Board of Directors Establish a Special Committee? • Which Directors Should be on the Special Committee? • Deciding the Mandate of the Special Committee • What Fees Should be Paid to Special Committee Members? • What are the Duties of the Special Committee • Choosing Experts • Process • Deliberations/Recommendation • Closing Remarks • Questions & Answers 41
  42. 42. Historical Context Corporate Law Directors’ Responsibilities • Manage/supervise management of the corporation - Choose/approve/monitor senior management - Strategic planning/direction Duties • Fiduciary duty - To act honestly and in good faith with a view to the best interest of the corporation • Duty of care - To exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances Conflicts • The Board must act in a manner that leaves it free of conflicts - Disclosure/declaration of interest in a material matter - Amount of input on decision making relating to the matter under conflict - Can impact voting 42
  43. 43. Historical Context continued… Securities/Regulations • Independent Ontario and Quebec securities regulation lead to the collaborative Multinational Instrument 61-101 - Protection of Minority Security Holders in Special Transactions • National Policy 58-201 - Corporate Governance Guidelines Common Law Foundations • The fundamental basis of fiduciary duty and duty of care under corporate law is founded in the common law 43
  44. 44. When Should a Board of Directors Establish a Special Committee? • Unusual Circumstances - Related party transactions (including transactions with the majority shareholder or involving a management buyout) - Sale of the enterprise - Take-over bid (hostile) - Dealing with conflicted advisors - Internal investigations • MI 61-101 independent/special committees - On an insider bid to determine the valuation and supervise the valuation preparation for an “insider bid” - Required disclosure of any deliberations, considerations, recommendations, etc. 44
  45. 45. When Should a Board of Directors Establish a Special Committee continued… • Companion Policy to MI 61-101 - Determination of “fairness” of a transaction – normally should include whether the transaction has been reviewed and approved by a special committee - To safeguard against the potential for an unfair advantage for an interested party. It is “good practice” that a special committee conduct or review and recommend action on the negotiation of a transaction with an interested party - Generally take the view that it is appropriate for every material transaction to which MI 61-101 applies a special committee should be put in place • Better safe than sorry – a special committee oversight and recommendation provides additional “fairness” in the process. 45
  46. 46. Which Directors Should be on the Special Committee? • Independence • MI 61-101 - General Rule • independence is a question of fact - People who are specifically not independent • “interested party”* • employee, insider, associated entity of interested party (current or within 12 months) • adviser of interested party in connection with the proposed transaction or employer (current or within 12 months) • has material financial interest in an interested party • would reasonably be expected to receive a benefit from the transaction not available pro rata to other security holders (could be broader than holders of common shares) and particularly – opportunity to offer a financial interest in - an interested party or an affiliate the issuer successor to the issuer 46
  47. 47. Which Directors Should be on the Special Committee? continued… *“interested party” - basically anyone having an interest in the proposed transaction that is different from the general security holder base and persons who have an interest/relationship with the interested party 47
  48. 48. Deciding the Mandate of the Special Committee Basis • Established by the Board • Must report to the Board Typical for M & A • Usually provided authority to hire independent advisors (investment bankers, valuators, legal counsel, pension experts) • Consider alternatives presented or available to the corporation • Engage in a market canvass • Review proposals • Negotiate/supervise the negotiation of proposals • Recommend course of action to the Board • Oversee implementation 48
  49. 49. Deciding the Mandate of the Special Committee continued… Typical for “internal investigation” • Usually provided authority to hire independent advisors (investment bankers, valuators, legal counsel, pension experts, forensic professionals) • Authority to obtain all necessary information and documentation of the corporation related to the matter • Direct management to assist in the investigation on a confidential basis • Report to the Board • Recommend a course of action 49
  50. 50. What Fees Should be Paid to the Special Committee Members? • Established/ratified by the Board • Impact on corporation and its ability to complete a transaction • Perceived conflicts created by structure • Best practice 50
  51. 51. What are the Duties of the Special Committee? • As per statutory and common law duties discussed earlier • New “duties”: - Review their and other members’ status as independent - Engage in a process that is under the committee’s control and direction - Consider use of independent advisors and solicit advice as appropriate - Consider disclosure issues related to the mandate - Prepare a complete and accurate review of deliberations – how detailed? - Consider all affected parties (i.e. employees, debt holders, other security holders) - Undertake the mandate in a comprehensive and complete manner exercising independent judgment 51
  52. 52. Choosing Experts • Independence • Expertise - Subject matter - Industry sector • Free of conflicts - Examples of financial advisors and current legal counsel • Cost 52
  53. 53. Process • Mandate - Clearly articulated mandate • Meetings - As often as necessary – can be a very compressed time frame - “In person” preferred to conference calls - Invitees where necessary to obtain information - Confidentiality of information and deliberations pending recommendation - Attendance of experts - Minutes - Notes - Materials 53
  54. 54. Deliberations/Recommendation • Review materials • Consider alternatives/options • Seek and consider advice of experts • Consider views of all members • Consider all stakeholders and impact on the corporation • Discuss with Board • Consider input of the Board • Recommend a course of action *Deliberations and recommendation of special committee may be required to be set out in the disclosure to shareholders and include dissenting views within the committee 54
  55. 55. Closing Remarks What is special? • Independence of the entire committee • Process is subject much more to scrutiny • Documentation of process and deliberations expected to be more detailed so as to provide full disclosure • Provides a level of comfort to the full Board on the “fairness” of a transaction with an interested party or on the substance to allegations of alleged wrongdoing • Securities regulators believe special committees play an important procedural role protecting minority shareholders from unfair treatment in a transaction with an interested party • Market participants hold the process and role as important 55
  56. 56. Mining Taxation: Tips and Update Don Sommerfeldt Consultant 56
  57. 57. “The hardest thing in the world to understand is the income tax.” Albert Einstein 57
  58. 58. “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” John Maynard Keynes 58
  59. 59. 2013 Federal Budget Recap • Pre-production mine development expenses • Accelerated capital cost allowance • Reserve for future reclamation costs • Mineral exploration tax credit 59
  60. 60. Budget 2013 Recap Mining Expenses Policy Objectives • Policy: Align deductions in the mining sector with those in the oil and gas sector • Budget 2007 phased out accelerated CCA for tangible assets in oil sands projects 60
  61. 61. Budget 2013 Recap Mining Expenses Policy Objectives • Budget 2011 changed deduction rates for intangible expenses for new oil sands mines • Similar changes will be enacted for other mining businesses • Similar transitional relief will be available 61
  62. 62. Budget 2013 Recap Mining Expenses Policy Objectives • Proposed changes target the mining sector generally, including coal producers • G-20, including Canada, will phase out “mediumterm inefficient fossil fuel subsidies” 62
  63. 63. Budget 2013 Recap Pre-Production Mine Development Expenses • PPMDE means intangible expenses incurred to bring a new mine into production in reasonable commercial quantities • Examples: expenses of removing overburden, sinking a mine shaft or constructing an adit 63
  64. 64. Budget 2013 Recap Pre-Production Mine Development Expenses • PPMDE are currently treated as CEE (100% deduction in the year incurred; may be carried forward indefinitely) • PPMDE incurred after March 21, 2013 will be treated as CDE (30% deduction on a decliningbalance basis) 64
  65. 65. Budget 2013 Recap Pre-Production Mine Development Expenses PPMDE transitional schedule Year 2013 2014 2015 2016 2017 After 2017 CEE 100% 100% 80% 60% 30% n/a CDE n/a n/a 20% 40% 70% 100% 65
  66. 66. Budget 2013 Recap Pre-Production Mine Development Expenses • Grandfathering: Existing rules apply for PPMDE incurred:  before March 21, 2013  before 2017 under a written agreement made before March 21, 2013, or for a new mine if construction or engineering and design work started before March 21, 2013 66
  67. 67. Budget 2013 Recap Pre-Production Mine Development Expenses • Government’s stated objectives:  ensure that investment decisions in respect of mining projects are based on market factors, not income tax treatment  remove incentives so as to help the government attain its goals for the reduction of greenhouse gas emissions, the protection of air and water quality and the conservation of ecosystems and habitat 67
  68. 68. Budget 2013 Recap Impact on Pre-Production Mining ITC • Before March 21, 2013, PPMDE qualified for a 10% investment tax credit • Although Budget 2012 announced the phase out of the PPMDE ITC, grandfathering was available until 2015 68
  69. 69. Budget 2013 Recap Impact on Pre-Production Mining ITC • The wording of the 2013 Notice of Ways and Means Motion had the effect of eliminating the grandfathering in Budget 2012 • This was an oversight that has been fixed by the Department of Finance 69
  70. 70. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining • Most machinery, equipment and structures used in a mine qualify for CCA at the rate of 25% on a declining-balance basis • Accelerated CCA is currently available as an additional allowance for certain assets used in new mines or eligible mine expansions 70
  71. 71. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining • Under the additional allowance, up to 100% of the remaining cost of eligible assets used in a new mine or an eligible mine expansion may be deducted • The additional allowance will be phased out from 2017 to 2020 71
  72. 72. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining Additional allowance phase-out schedule Year 2013-2016 2017 2018 2019 2020 After 2020 Percentage 100% 90% 80% 60% 30% n/a 72
  73. 73. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining • The previously announced phase-out of the additional allowance in respect of oil sands and oil shale will be complete in 2015 73
  74. 74. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining • Grandfathering: Existing rules apply for eligible assets acquired:  before March 21, 2013  before 2018 for a new mine or mine expansion under a written agreement made before March 21, 2013, or if construction or engineering and design work started before March 21, 2013 74
  75. 75. Budget 2013 Recap Accelerated Capital Cost Allowance for Mining • Government’s stated objectives:  ensure that investment decisions in respect of mining projects are based on market factors, not income tax treatment  remove incentives so as to help the government attain its goals for the reduction of greenhouse gas emissions, the protection of air and water quality and the conservation of ecosystems and habitat 75
  76. 76. Budget 2013 Recap Reserve for Future Reclamation Costs • A reserve may be claimed for amounts received in respect of services that must be rendered in the future • Some taxpayers have claimed this reserve in respect of future reclamation costs • Budget 2013 precludes a reserve in respect of a reclamation obligation 76
  77. 77. Budget 2013 Recap Reserve for Future Reclamation Costs • Grandfathering: Existing rules apply in respect of future reclamation costs authorized by a government or regulatory authority before March 21, 2013 if the amounts are received before 2018 or are received under a written agreement made before March 21, 2013 77
  78. 78. Budget 2013 Recap Reserve for Future Reclamation Costs • Consider using a qualifying environmental trust (QET) • The income earned by a QET is subject to tax 78
  79. 79. Budget 2013 Recap Mineral Exploration Tax Credit • In 2000 the Government introduced the METC for flow-through share investors • The METC was intended to be available from 2000 to 2004 • The METC has been extended in one-year increments 79
  80. 80. Budget 2013 Recap Mineral Exploration Tax Credit • Budget 2013 extends the METC for flow-through share agreements made before April, 2014 • Individual flow-through share investors may obtain a tax credit equal to 15% of qualifying mineral exploration expenses 80
  81. 81. Budget 2013 Recap Mineral Exploration Tax Credit • Flow-through share funds raised in the first three months of 2014 can support qualifying expenses incurred by a principal-business corporation before 2016 81
  82. 82. Daishowa-Marubeni International Ltd. v. The Queen, 2013 SCC 29 Facts • DMI sold two Alberta forest tenures • The allocated price of one tenure was $20 million • Alberta legislation and regulatory policy required the purchaser to assume the future reforestation obligations in respect of the tenures 82
  83. 83. Daishowa Facts • The cost of reforesting the first tenure was estimated to be $11 million • The sale contract required the purchaser to assume the reforestation obligations, but the price did not include the cost of reforestation • Rather, in negotiating the price, the parties subtracted the cost of the reforestation obligation from the value of the tenure 83
  84. 84. Daishowa Issue and Decision • CRA included the $11 million future reclamation cost as part of DMI’s proceeds of disposition • The SCC held in favour of DMI 84
  85. 85. Daishowa Reasons • The cost of future reforestation is not analogous to a mortgage (which does not affect the value of the mortgaged land) • The cost of future reforestation is analogous to the cost of fixing a building in need of repairs (which is embedded in the property and which decreases the value of the property) 85
  86. 86. Daishowa Mining Application • Under the Alberta Environmental Protection and Enhancement Act, an operator of a mine has certain reclamation obligations • When the mine is sold, the purchaser, which becomes the new operator, has a statutory duty to reclaim the land 86
  87. 87. Daishowa Mining Application • Reclamation obligations under the EPEA are future costs that cannot be severed from the mine and that depress the value of the mine • When a mine is sold, the cost of future reclamation should not be included in the vendor’s proceeds of disposition 87
  88. 88. Daishowa Mining Application • When drafting a purchase and sale agreement for a mine, the agreement should not allocate any amount to embedded obligations, including future reclamation costs, assumed by the purchaser 88
  89. 89. Daishowa Mining Application • The contractual description of the consideration and the future reclamation obligation should be carefully reviewed to ensure that the reclamation cost cannot be viewed as part of the price 89
  90. 90. Director’s Liability Income Tax Act and Excise Tax Act • If a corporation fails to withhold and remit employee source deductions or non-resident withholding tax or fails to collect and remit GST, the corporation’s directors may be personally liable 90
  91. 91. Director’s Liability ITA and ETA • Possible defences:  the director exercised the care, diligence and skill of a reasonably prudent person  the director resigned more than two years before CRA’s notice of assessment against the director 91
  92. 92. Director’s Liability Bohbot-Gagnon v. The Queen, 2013 TCC 128 • The director ensured that source deductions were withheld, but did not ensure that the funds were remitted to CRA • Held: The director was personally liable 92
  93. 93. Director’s Liability Bohbot-Gagnon • Having operated her own business for five years, the director knew how government remittances worked • The director should have reviewed the corporate books to ensure that remittances were in order 93
  94. 94. Director’s Liability Bouchard v. The Queen, 2013 TCC 31 • B alleged that she ceased to be a director in April 2006 • In May 2007, when B learned that the corporation’s minute book still showed her as a director, she resigned in writing 94
  95. 95. Director’s Liability Bouchard • In July 2008 a paralegal in B’s office filled out a questionnaire for Revenu Québec, which B signed without reading and which indicated that she was a director • In September 2008 B signed a power of attorney and a resolution in respect of the corporation 95
  96. 96. Director’s Liability Bouchard • The corporation collected GST but failed to remit it to CRA • In July 2010 CRA assessed B 96
  97. 97. Director’s Liability Bouchard • Held: B was personally liable • The evidence showed that B signed resolutions and other corporate documents until September 2008, which was less than two years before the assessment date • B was a de facto, if not a de jure, director 97
  98. 98. Director’s Liability Principles to Take Away • The due diligence defence requires a director to exercise care, diligence and skill to prevent a failure by the corporation to withhold (or collect) and remit 98
  99. 99. Director’s Liability Principles to Take Away • When a director ceases to function as such, he or she should resign in writing, ensure that a notice of change of directors is filed at Corporate Registry and not do any director-like act thereafter 99
  100. 100. Questions? 100
  101. 101. Thank you! Leanne Krawchuk Colleen Cebuliak Shauna Finlay Don Sommerfeldt 780 423 7198 780 423 7136 780 423 7392 780 423 7227
  102. 102. The preceding presentation contains examples of the kinds of issues that employers could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.