30 March 2012

Mauritius paves the way for Australian route into Africa

We have previously blogged about Africa’s importance to Australian mining , and the vast amount of resources work going on in the region – but how can you get your foot in the door?

On Monday night we attempted to answer this when our Perth office hosted 50 guests from the mining, legal and accountancy sectors to talk about African investment and why Mauritius could be your gateway into Africa. The seminar included informative and thought-provoking presentations from the Mauritian Board of Investment, Intercontinental Trust Ltd, Stock Exchange of Mauritius, and HSBC Bank (Mauritius) Ltd, each highlighting the opportunities in this region.

Freehills partner, Justin Little, set the scene with an overview of Australian mining companies’ increasing investment in resource-rich African projects and the legal and commercial challenges that these companies face, including: a lack of infrastructure, skills shortage, reporting and compliance issues, political and social instability, the threat of the nationalisation of the mining industry, changes in fiscal regimes and obtaining financing.  Justin’s overall message was “opportunity knocks for those investors who are prepared to tackle and surmount the challenges that mining in Africa poses” but “the potential for elephant-sized discoveries comes with elephant-sized risks”.

Against the backdrop of these challenges, Managing Director of the Mauritian Board of Investment, Ken Poonoosamy, spoke about the attractive business environment that Mauritius – “the star and key of the Indian Ocean” – has to offer and how its economic, political, legal and fiscal regimes create a competitive platform for Australian companies wishing to invest in Africa.

White sandy beaches and pristine azure blue waters aside, why use Mauritius as an international hub for investing into Africa as opposed to another country or investing directly into Africa?  Why would you not, was the resounding answer from CEO of Intercontinental Trust, Ben Lim, who gave insight into the many perceived benefits of using Mauritius, such as its bilateral investment treaties and fourteen double taxation agreements with Africa, its membership of the African Union and regional economic blocs (such as COMESA and SADC), low income and corporation taxes, lack of capital gains tax and relative ease and efficiency of establishing corporate vehicles.  Ben contrasted this with the arguably less attractive option of investing directly into Africa which comes with the burden of high withholding taxes, capital gains tax, high investment risks and no preferential access.

If that was not enough for the audience to start booking their flights, Chief Executive of the Stock Exchange of Mauritius, Sunil Benimadhu, threw into the bargain the possibility for Australian investors to list their companies on Mauritius’s very own Stock Exchange – one which, according to Sunil, offers a cost competitive and stream-lined listing process, while accommodating dual-listing, and trading in various currencies including USD, GBP and the Euro.

Despite the building momentum behind Australian mining companies investing into Africa, the start-up costs of their projects are significant and, so, financing is often the end game for investors.  Participants were therefore pleased to hear from Managing Director of HSBC Mauritius, James Boucher, that the Mauritian banking system has grown over the years to become part of a sophisticated international banking system – one which is becoming increasingly tailored to its foreign mining clients and which covers the full box and dice of business solutions and services, ranging from acquisition, project, export and trade finance, foreign exchange and treasury services to cash management.

We would like to thank our presenters Ken, Ben, Sunil and James for sharing their knowledge and insight into what Mauritius has to offer as a gateway into Africa.

28 March 2012

A global contract law? What is in store for Australia?

Some utopian visions of the world foresee that, in a globalising economy, we will be ruled by a ‘global law’ – a law that is not connected to any particular nation state. But the concept of a universal law, applying across nation states, regardless of the nationality of market participants is in fact very old. It is found in the medieval concept of the lex mercatoria – the law merchant – which applied to all merchants in the vibrant medieval international economy. Now, in response to the internationalisation of markets, we are seeing a resurgence of that vision, especially by nations such as Australia which stand outside any of the major trading blocs and seek to be relevant.

The Australian Government has recently released a discussion paper, Improving Australia’s Law and Justice Framework: A discussion paper to explore the scope for reforming Australian contract law: Discussion Paper. Such reforms are said to be necessary in light of the lack of uniformity of contract law across Australian jurisdictions, the lack of clarity as to the applicable law in particular contract disputes and international developments in contract law. The discussion paper is a broad-ranging one and covers many issues including the possible codification and ‘harmonisation’ of contract law.

Of particular interest and importance are the aspects of the paper relating to Australia’s contract law in the context of international commerce. The paper notes that a key potential obstacle to greater economic integration with Australia’s main trading partners are the differences between their systems of contract law and Australia’s and acknowledges the potential benefits in Australia being an early adopter of the developing “international law of commerce”. The paper makes reference to a number of important international approaches to contract law including the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention) and the UNIDROIT Principles of International Commercial Contracts. Each of these have been attempts at codifying parts of the law merchant. They are important sources of restatement of the fundamental rules that apply to any international transaction.

The challenge for Australia is how it best integrates its economy into the international world economy, especially in this ‘Asian Century’. The discussion paper on the reform of Australian contract law should be seen in the context of two other projects already underway or about to proceed. The first is the Prime Minister’s forthcoming White Paper on Australia in the Asian Century: Australia in the Asia Century. The second is the possible project to be approved in April by the Standing Council on Law and Justice (previously known as the Standing Committee of Attorneys-General) on the private international law aspects of commerce: Standing Council on Law and Justice.

All three projects sharpen our focus on the international dimensions of our economy and legal system.

This is an exciting time for those concerned about the international dimensions of commerce – these projects bring many opportunities for reform but also great risks. As the projects proceed we will bring you insights into the issues and thinking that stand behind them.

This post is written by Freehills Partner Don Robertson.

23 March 2012

Foreign mining investors to be stripped of majority ownership

Foreign mining investors will be required to divest majority ownership in companies holding mining business permits under a new Presidential Regulation issued recently.

On February 21 this year, the Indonesian Government implemented a forced divestment framework to capture and ultimately control mining projects.  This new regulation, Government Regulation No.24, deals with a number of issues including the procedures for the extension of Contracts of Work and Coal Contracts of Work but the provisions that are getting most attention are those requiring an increased compulsory divestment of ownership to Indonesian Participants.

The new Indonesian Mining Law enable foreign investors to hold mining business permits for the first time.  But here’s the kicker – foreign investment companies that hold licences for a producing mine of 5 year maturity are required to divest 20% of the mine to Indonesian Participants, and after ten years the shareholding percentage held by Indonesian Participants must be not less than 51% (it goes up incrementally from 5 years).  There is also stipulation on which Indonesian Participants have priority.  Shares must be offered to the Central Government and if it is not interested, then to the Provincial Government or Regional Governments; State owned and regional owned enterprises; and finally to national private business entities that are 100% owned by domestic investors.

Shares offered to State and regional owned enterprises or  to national private business entities must be offered by way of auction, but it is not yet clear how this process will work. Others areas of concern are that the regulations are yet to provide any details on the pricing of offers made to the a Government.

There are of course a number of technicalities around what happens to existing Contracts of Work and Coal Contracts of Work including how and whether they can be extended – but what is clear is that companies operating in this area need to familiarise themselves with these laws, and quickly as they are already in effect!

6 March 2012

Mining M&A continues to surge

by Simon Reed, Partner, Perth

Looking back at the public M&A activity in the last 6 months, the mining and energy sectors clearly stand out accounting for almost half of all deals.

But what does this all mean? What do numbers and stats really tell us?

Well, they tell us that even though total deal numbers are slightly down on previous years (57 public M&A deals announced, compared to 75 deals in the same period in FY2011), energy and resources is still dominant. They tell us that there’s been significant activity at the upper end of the market, where in the mining sector 35% of transactions exceeded $500 million in value (this is even higher in the energy sector – which includes coal plays – where 60% of the deals announced related to targets of $500 million or more in value). Some notable deals were the bids for Anvil Mining and Sundance Resources as well as the proposed merger of Aston Resources and Whitehaven Coal.

They tell us that Western Australia continues to play a key role in the public M&A activity, with the majority of targeted companies having projects either in Western Australia or Africa. Of the 17 resources deals announced in the first half of FY2012, 53% had primary assets located in Western Australia. 35% of those targets had assets located in Africa – a trend we expect to see grow.

They also show us a couple of interesting trends that have emerged in how mining M&A is being executed: the strong preference in the resources sector is to undertake friendly deals with target board support. 70% of resources deals have been launched with target board support – contrast this to the energy sector, where the vast majority of transactions have been initiated as hostile deals.

Finally, against a backdrop of stronger preferences for cash consideration in public M&A generally, the resources sector continues to show an appetite for scrip consideration, with resources deals being launched with an equal preference for scrip or cash.