Joint Venture is a commercial mineral exploration operation method often used by junior exploration companies and large mining companies. It can also be a commercial mineral exploration operation method between junior exploration companies. In essence, it is also one of the financing methods for mineral exploration.
1. Characteristics of Joint Venture Exploration
(1) Joint Venture Exploration literally means joint venture in English, which means taking risks. Both parties to the joint venture must jointly bear the risks of mineral exploration and at the same time enjoy the rights and interests of the prospecting results.
(2) The success rate of mineral exploration is very low, and most joint ventures and cooperative explorations cannot find economic deposits that can be developed. Therefore, joint venture and cooperative exploration is unstable and can be suspended at any time. When prospecting fails, in order to facilitate the separation of the joint venture partners and to facilitate the handling of the legal and financial issues of the joint venture partners during the breakup, it is more appropriate to establish an unincorporated cooperative exploration enterprise during the exploration stage.
(3) Joint venture and cooperative exploration are complementary. Generally, one party has the exploration rights with prospecting potential, and the other party has the technical resources to conduct feasibility studies and development, and has the financing ability. "Money-money cooperation" is not the starting point for joint venture exploration.
(4) In the mineral exploration stage, the value of exploration rights is difficult to calculate and evaluate. Through a joint venture and cooperative exploration agreement, the value of the exploration rights can be calculated based on the investment amount of the participating parties and the equity ratio of both parties. Therefore, the joint venture agreement method has become one of the methods for evaluating exploration rights and is also the most commonly used method in the exploration stage.
(5) The joint venture and cooperative exploration combination method is flexible. Starting from complementary needs, primary mineral exploration companies and large mining companies are the main ones. There are many successful examples, such as the cooperation between Dia Met and BHP in diamond exploration and development in northern Canada, and the cooperation between Arequipa Gold and Balik in gold exploration and development in southern Peru.
II. Key points of joint venture and cooperative exploration
1. Both parties of joint venture and cooperative exploration
No matter how many companies participate in joint venture and cooperative exploration, only It can be divided into two parties:
——The transferor. There is a proper term in Australia: Farmor, which refers to a party that owns non-cash assets and is prepared to transfer part of the non-cash assets to a joint venture in exchange for part of the equity of the joint venture. The transferor is generally a junior exploration company and my country's geological exploration unit. Non-cash assets are mainly the transferor’s exploration rights. The value of a prospecting right is the prospecting potential within the prospecting right area. The prospecting potential within the exploration right area is inherent in the registered exploration right itself, or is formed by the exploration work invested by the transferor. For example, non-publicly published geological maps, specialized geological research maps and research reports, various geophysical and geochemical survey results, remote sensing data processing results, as well as trench exploration, shallow wells, and exploration drilling results. The transferor's expertise (such as proprietary prospecting methods and proprietary prospecting technologies) for the exploration rights area can also be included as Know-how. Sometimes the transferor's assets may also include some fixed assets, such as field exploration camps and exploration equipment in the exploration rights area. Among the transferor's non-cash assets, the legal and valid exploration rights are the key, and others may or may not be present. The transferor’s investment in obtaining and maintaining exploration rights includes exploration rights registration fees, exploration rights usage fees, environmental protection deposits for exploration, exploration investments higher than the legal minimum exploration investment, as well as fees for submitting annual geological reports and handling legal and community affairs. . These investments made by the transferor will generally appreciate in value when establishing a joint venture to transfer exploration rights. The extent of the appreciation depends on the prospecting results after the transferor's investment, that is, the increase in prospecting potential. It is also related to the price of mineral products and the market conditions of exploration rights at that time. Of course, exploration rights often depreciate after the transferor invests.
——Enter side. There is also a proper term in Australia: Farmee, which refers to a party that has funds and is prepared to invest in a joint venture and bear the exploration costs and risks in exchange for part of the equity in the joint venture.
Entrants are generally large mining companies or foreign junior exploration companies that are Sino-foreign joint ventures in joint exploration. At present, some Chinese companies “go out” and become entrants, and there are many such cases. For example, a Chinese company invested in a joint venture exploration of gold mines in Mwanza Province, Tanzania, and the transferor was Tanzanian Royalty Exploration Corp, a Canadian listed junior exploration company. The entrant is interested in the prospecting potential of the exploration rights area it is about to enter, or is also interested in the adjacent areas to which the entrant already has exploration rights. During the joint venture exploration period, the entering party shall bear the risk of exploration investment. The entering party is generally required to own more than 50% of the equity in the joint venture exploration enterprise. According to common practice, the entrant usually requires that it ultimately owns 70 to 80% of the mineral rights.
2. Exploration rights area
When a joint venture and cooperative exploration enterprise is established, the transferor shall transfer the exploration rights to the joint venture and cooperative exploration enterprise at the same time and become a non-cash asset of the joint venture and cooperative exploration enterprise. If it is an unincorporated joint venture, the contract must state a commitment: after the discovery of economic mineral deposits, the transferor shall transfer the exploration rights to the legal person joint venture of both parties. The terms under which the exploration rights are to be injected into the joint venture are legally binding. When a joint venture and cooperative exploration enterprise is established, the exploration rights area injected can be one block or multiple blocks.
3. Area of ??Interest
Area of ??Interesting refers to a certain range of areas outside the exploration rights area. The area of ??interest and the exploration rights area of ??the joint venture have similar mineralization geological conditions, and have the prospect of finding the same target deposits. For example, a junior exploration company provides 2 exploration rights covering an area of ??78 square kilometers, looking for copper-zinc massive sulfide deposits. Its periphery covers an area of ??about 4,300 square kilometers, with marine volcanic rock systems of fine porphyry distributed there. It is a promising area for searching for copper-zinc massive sulfide deposits. In the contract, both parties to the joint venture agreed that the area would be the “area of ??interest” (Figure 5-2).
Figure 5-2 Area of ??Interest and Cooperative Exploration Rights Area
A—Area of ??Interest; B—Cooperative Exploration Rights Area
The area of ??interest is only for A constraint imposed by the joint venture and cooperation parties, which cannot exclude third parties other than the joint venture and cooperation parties from obtaining exploration rights in the area of ??interest. For both parties to the joint venture, during the cooperation period, neither party shall exclude the other party from independently obtaining exploration rights in the area of ??interest. This is a guarantee and restriction for the interests of both parties in the joint venture and cooperation, and prevents any party from using the technical results of the joint venture's cooperative exploration to seek unilateral benefits. The understanding of the mineralization rules of this type of deposits in the area, effective prospecting technologies and methods, and research on ore dressing and smelting properties are the common property of both parties to the joint venture. If one party uses this expertise to independently obtain exploration rights in the area of ??interest, it will harm the interests of the other party in the joint venture.
4. Earning shares and Earning Period
According to the contract, the entrant must unilaterally invest a specified amount of exploration funds within a certain period of time, that is, during the Earning Period. , gradually earn the rights and interests of joint ventures year by year. After completing the specified exploration investment within the specified time limit, the entrant will obtain the initial equity. For example, according to the contract, the entrant York Mining Corp. unilaterally invested US$24 million in mineral exploration during the five-year equity earning period and obtained 55% of the equity in the joint venture.
The consideration of US$24 million for 55’s equity means that the value of the transferor’s exploration rights is 19.64 million yuan. Although the contract stipulates that the entrant must invest 24 million yuan to earn 55% of the equity, but unlike other joint ventures, the 24 million yuan is not paid in one go, but in installments according to the conditions for earning shares stipulated in the contract. The annual investment and earned shares stipulated in the contract are shown in Table 5-2.
Table 5-2 York Mining Company’s equity during the stock-earning period
During the stock-earning period, the entrant must complete the annual investment stipulated in the contract. Investment in earning stocks can be completed in advance, but cannot be postponed. After the exploration investment of US$24 million is completed, 55% of the equity of the joint venture can be earned.
Since mineral exploration is a high-risk investment, in most cases, the expected results of exploration are inconsistent with the actual situation. Therefore, the entrant has the right to withdraw from the joint venture and cooperative exploration in any share-earning year. If you withdraw before completing the investment to earn shares, the entrant’s investment cannot be recovered and the initial equity of 55% cannot be obtained.
5. Fixed ratio investment
Except for the minimum investment of the entrant, there are no regulations on the total investment of the entrant. Fixed-ratio investment requires the entrant to invest unilaterally until the feasibility study is completed. No matter how much the entrant invests, the entrant can obtain 70 to 80% of the equity. The fixed ratio method reflects the high-risk characteristics of mineral exploration. If a relatively small amount of capital is invested to find an economic deposit and a feasibility study is completed, it will be beneficial to the entrant; if a large amount of capital is invested to find an economic deposit and a feasibility study is completed, it will be beneficial to the transferor.
6.***Dilution of equity during the same investment period
After the entrant completes the fixed investment in the stock-earning period, the stock-earning period ends and enters* **Same investment period. During the same investment period, mineral exploration, pre-feasibility studies, and feasibility studies must be invested in proportion to equity interests.
Because the parties to the joint venture have different understandings of the prospecting prospects of the exploration rights area, or have different evaluations of the profit prospects of the discovered mineral deposits, or have difficulties in raising funds, it is possible that one party to the joint venture may not be interested in a certain We are unwilling to invest in the exploration budget for this stage. At this time, the equity dilution formula must be used to dilute the equity ratio of the non-investing party.
The following is a hypothetical example to illustrate. Company A is the entrant. The contract stipulates that Company A will invest US$4 million during the stock-earning period. At the end of the stock-earning period, it will obtain 55% of the equity. Company B, as the transferor, retains 45% of the equity after the share-earning period ends. According to the terms of this contract, the value of the transferred exploration rights can be calculated as US$4 million × 45/55 = US$3.27 million. After entering the same investment period, the new exploration plan budget is US$1.75 million. If Company B indicates that it will not invest in the current exploration plan, Company B’s equity will be diluted. Calculate according to the following formula:
Company A’s equity = Company A’s investment/total investment×100=5.75 million US dollars/9.02 million US dollars×100=63.74
Since Company B does not invest, A The company's equity increased from 55 to 63.74, and Company B's equity was diluted from 45 to 36.26.
During the exploration planning period, if the ore conditions are good or the price of mineral products rises, Company B plans to return to 45% of the equity. It turns out that Company B only needs to invest US$787,500 (US$1.75 million Only 45% of the equity can be repurchased at twice the price. The right to buy back is only available once and only applies to joint venture partners. Because during this exploration planning period, Company A bears the exploration risks alone and has excess buyback conditions, which is in line with the operating philosophy of commercial mineral exploration. The excess buyback condition also requires all parties to the joint venture to treat each stage of the exploration plan carefully.
Equity dilution is not unlimited. There are two approaches. One is to stipulate that the bottom line of dilution is reached, such as 5 to 10, which means that the diluted party will automatically withdraw from the joint venture and the remaining rights and interests cannot be recovered; the second is to reserve a dilution for the diluted party that will no longer invest. The minimum equity is generally 10. This approach is very popular among geological exploration units in my country.
3. General operating procedures for establishing joint ventures and cooperative explorations
It takes a lot of time and management resources to establish joint ventures and cooperative exploration companies with large mining companies. This is because the exploration goals of large mining companies are relatively high. For example, BHP Billiton requires a "World Class Deposit", which means that after the development of the deposit, it will be competitive on a global scale, rather than the number of tons of reserves. . The world's two largest gold mining companies: Balik and Newmont, both have a goal of setting a starting point for gold mine reserves of 1 million ounces. In addition, if a large mining company wants to establish a joint exploration enterprise, it must be evaluated by different departments of the company, and there are many levels of participation and approval.
Since junior exploration companies have few management levels and management resources, it is relatively simple and quick to establish joint ventures and cooperative exploration enterprises with junior exploration companies. The evaluation of the value of exploration rights and the amount of exploration investment during the stock-earning period are no different from those of large mining companies. In the mineral exploration stage, there is no situation where large mining companies invest more and junior exploration companies invest less. This is a misunderstanding. The investment in a joint venture essentially depends on the value of the exploration rights and the equity ratio required by the entrant. At present, domestic geological exploration units tend to establish joint ventures and cooperative exploration enterprises with primary exploration companies.
From 1988 to 1992, the author presided over the operation of Kangdian Company, the first Sino-foreign cooperative exploration enterprise in my country, established by the Southwest Metallurgical Geological Exploration Bureau of the former Ministry of Metallurgical Industry and BHP Mining Company, which took 4 years. We will take this as an example to introduce the general operating procedures for establishing a joint venture for cooperative exploration.
In May 1987, when the author was about to finish his further studies at BHP Mining Company, Barry Vivian, the foreign affairs and development manager of BHP Mining Company, asked the author for consultation on the People's Republic of China and the National Metallurgical Corporation. Is there any possibility of joint exploration between the Southwest Metallurgical Geological Exploration Bureau of the Ministry of Industry and BHP Mining Company? After obtaining the consent of the former Ministry of Metallurgical Industry, the author reported to the Sichuan Provincial Planning Commission. It happened that Zhang Haoruo, the governor of Sichuan Province, led a delegation to visit Australia, so joint exploration was included in the last of the 16 cooperation projects proposed by China. During the visit to Australia, the Australian side proposed that the joint venture exploration project be included in the No. 1 project of China-Australia cooperation, and a memorandum of understanding on joint venture exploration was signed. This laid a good foundation for the establishment of the project and the support of relevant government departments and regions of Sichuan Province for this project. Subsequently, BHP Mining Company translated the full text of the author's "Geological Exploration Management of Australian BHP Exploration Company" report into English. Manager Vivian annotated it paragraph by paragraph and exchanged views, forming a basically consistent understanding of joint venture exploration between both parties.
1. Determine the exploration rights area for joint venture exploration
Considering that it was very difficult to carry out joint venture exploration of precious metals under the conditions at that time, we selected the layers in the Huilihuidong area of ??western Sichuan. Controlled lead-zinc mines are the preferred mineral types, deposit types and working areas for joint venture exploration. The MVT type lead-zinc deposit is also the exploration target mineral type and target deposit type of BHP Exploration Company. Finally, an exploration rights area of ??148 square kilometers was selected as a cooperation area in places such as Huidong Hongguang, Sichuan.
2. Provide geological data and sign a confidentiality agreement
Providing as much geological data as possible is the key to the success of the joint venture exploration and is also the key to obtaining the best cooperation conditions for us. The Southwest Metallurgical and Geological Exploration Bureau provided BHP Exploration Company with 1:200,000 geological and mineral maps and descriptions, 1:50,000 geochemical dispersion anomaly maps and data, papers on Daliangzi lead-zinc mine and Tianbaoshan lead-zinc mine, and red Exploration report on optical lead-zinc deposits and scientific research report on the mineralization rules of layer-controlled lead-zinc deposits in the Kang-Dian axis. In the 1980s, the confidentiality of geological data was very strict. The former Geological Bureau of the Ministry of Metallurgical Industry issued a document agreeing to provide geological data to foreign companies within the scope of the confidentiality policy at that time. The issuance of this document cleared the first obstacle for the establishment of my country's first joint venture exploration project.
Before providing these geological data, a legally binding Confidential Agreement (Confidential Agreement) was signed with BHP Exploration Company in accordance with international practice. The agreement stipulates that the geological data provided by the transferor will only be used by the entrant to evaluate the joint venture exploration project and may not be used for other purposes or disclosed to third parties other than the parties. If a joint venture exploration agreement is not reached, all geological data will be returned to the transferor.
3. Geologists from BHP Exploration Company conducted field surveys to investigate the prospecting potential of the cooperation area
After studying the geological data provided by the transferor in detail, BHP Exploration Company sent chief geologist An Chris Arndt and Alaster Edwards conducted field surveys. They resampled the geochemical dispersion flow anomalies and channel exploration, observed and recorded the ore-bearing strata and ore-controlling unconformity surfaces, and determined the reliability of the transferor's geological data.
Based on the principle of "regional effect", the transferor arranged for geologists from BHP Exploration Company to inspect the Daliangzi lead-zinc mine adjacent to the exploration rights area. The main flat pit of Line 0 of Daliangzi Lead-Zinc Mine has a width of 100 meters, of which 30 meters is dense massive lead-zinc ore, which left a deep impression on Ander and Edwards. Through field surveys, the prospecting potential of the cooperation area was confirmed, and it was concluded that the potential to find world-class mineral deposits met the investment exploration standards of BHP Exploration Company.
4. BHP Mining Company’s legal and financial experts investigated the investment environment
Since there was no joint venture or cooperative exploration in China at that time, there was no precedent to learn from. As a large mining company, BHP needs to find mineral deposits that can be developed by itself, and it must understand many legal and financial issues involved in development. BHP Mining Company has sent bilingual lawyers and accountants many times to investigate China's investment environment. Lawyers are most concerned about the transfer and safety of prospecting rights. The suggestion that prospecting rights holders have priority in obtaining mining rights for mineral resources in the exploration operation area has aroused deep doubts among lawyers, and they have repeatedly asked the author to provide a reasonable explanation.
5. BHP Exploration Company’s drilling and other technical experts investigate China’s exploration contracting capabilities
In order to implement joint venture exploration projects and reduce exploration costs, foreign-funded companies should try their best to use local services and implement employee of localization. Drilling and other technical experts from BHP Exploration Company inspected the drilling, testing, geophysical and chemical exploration capabilities of the Southwest Metallurgical Geological Exploration Bureau, and sent the bureau’s drillers to Australia for training to meet BHP Exploration Company’s drilling technology standards. The safety director of BHP Exploration Company also went to the exploration area to inspect the on-site medical rescue conditions and implement the connection with international rescue. Through these inspections, preparations are made for the implementation of joint venture exploration.
6. Signing a preliminary agreement for joint venture exploration
Signing a preliminary agreement for joint venture exploration is a key step in implementation. In the preliminary agreement, the key points of the joint venture exploration will be fixed, including the scope of the exploration rights, the scope of the area of ??interest, the start and end of the equity earning period, the cash investment of the entrant, the equity ratio of both parties, etc. Through the cash investment and the equity ratio of both parties, the value of the exploration rights can be calculated back. This is the most applicable joint venture agreement method in the commercial mineral exploration market. The final joint venture exploration agreement will not amend the above points of the preliminary agreement.
The preliminary agreement for joint venture exploration between BHP Exploration Company and Southwest Metallurgical Geological Exploration Bureau stipulates 148 square kilometers of exploration rights and 4,200 square kilometers of interest areas, and is accompanied by maps. The equity ratio is 52/48, the equity earning period is 4 years, and the entrant invested A$4.2 million in cash. Back calculation showed that the value of the transferor’s exploration rights was A$3.88 million. The transferor, Southwest Metallurgical Geological Exploration Bureau, previously invested approximately 400,000 yuan in geochemical exploration and general survey of the Huidong Hongguang Lead-Zinc Mine in the area. According to the exchange rate at that time, the investment of the transferor, Southwest Metallurgical Geological Exploration Bureau, appreciated approximately 40 times. .
7. Obtain approval from relevant government departments
Since this is the first Sino-foreign joint venture exploration project in my country, it has attracted the attention of various ministries and commissions. The Second Bureau of the State Council Secretariat convened the National Planning Commission, the Sichuan Provincial Government, the Ministry of Geology and Mineral Resources, the Ministry of Metallurgical Industry, the People's Bank of China, and a certain bureau of the General Staff Department for study and coordination, and achieved unanimous understanding and approval from relevant government departments.
8. Obtain commitments from relevant government departments
Since this type of lead-zinc ore contains silver, the Chinese government stipulates that the precious metal must be sold to the People's Bank of China at a price stipulated by the state. There was a certain gap between this price and the international market price at that time. In order to break the deadlock in negotiations, the Sichuan Provincial Government made a government commitment that if the mine is put into production, the difference between the purchased silver price and the international price will be made up by the Sichuan Provincial Finance. The written commitment was signed by Ma Lin, the deputy governor in charge. This commitment is not legally traceable.
9. Formal signing of the final agreement on joint venture exploration
With the above work, after the textual revision of the joint venture exploration agreement, formal signing of the final agreement on joint venture exploration is just a ceremony sexual procedure. Then go through the industrial and commercial registration of Sino-foreign cooperative exploration enterprises, customs foreign exchange procedures, etc.
As mentioned above, due to the management requirements of large mining companies, multiple decision-making levels and long procedures, establishing joint venture exploration with large mining companies consumes a lot of management resources of the transferor. As investors, large mining companies have guaranteed investment, but management fees account for a large proportion. About half of the investment is spent on foreign personnel, and a relatively low proportion of the investment in earning shares is spent on exploration. Large mining companies have standardized management, attach great importance to employee training, and have a complete range of technologies. These are the advantages of establishing joint exploration joint ventures with large mining companies. Taking into account the fact that domestic transferors are mainly geological exploration units, junior exploration companies can make decisions quickly, have more flexible joint venture methods, and invest the same in earning shares as large mining companies. According to the author's practice, it is more beneficial to establish joint venture exploration with junior exploration companies.