Insights

Mining companies face significant political risk when undertaking projects in unstable regulatory environments. Resource nationalism is also on the rise across the globe which can result in private mining assets being expropriated without due compensation being paid.

Thus, while mining companies seek to satisfy demand for mineral resources by exploration in less stable geopolitical regions, they face increased risk of government intervention, which can give rise to international mining disputes against governments. Those disputes are complex, hard fought, and often require substantial financial resources.

Disputes finance companies, like Litigation Capital Management (LCM) see those international disputes as a potential area of growth for their business. LCM’s CEO Patrick Moloney considers disputes finance as an essential service to the mining sector in financing these disputes: “LCM has been monitoring developments in the mining sector globally. More and more, we see mining companies at increased risk of intervention by and disputes against governments. Those disputes are difficult to litigate and require substantial legal budgets. LCM is open to assist mining companies in asserting their rights for meritorious claims, and ultimately providing access to justice for mining companies who may otherwise not have the financial capability to fund years-long disputes with governments.”

A recent example of this is the dispute between Australian mining company Indo Gold Pty Ltd against the Republic of India, where LCM as the funder extended an unconditional funding facility of up to US$ 13.6 million for the prosecution of Indo Gold’s claims under the 1999 Australia-India Bilateral Investment Treaty arising out of, among others, India’s acts of expropriation, which included Rajasthan’s rejection of Indo Gold’s application for a prospecting license for the Bhukia project in Rajasthan, India.

Disputes finance can enable mining companies to pursue meritorious claims and bringing in a funder such as LCM ensures that the mining company has the financial backing to withstand delay tactics by its opponents, but also especially, access to top-quality legal representation. That enhances the mining company’s negotiation power and unlocks hidden value the financial backing offers. Established funders are also known to be staffed by experienced investment managers who have years of significant disputes experience under their belts. Those funders therefore are not just providing financing, they can also be an additional resource in areas such as costs control, case management, and legal strategy.

Importantly, the involvement of a litigation funder in an international mining dispute often brings into sharp focus key practical questions during the underwriting and due diligence process. The funder will require answers to fundamental questions such as what is the most realistic damage estimate that can be obtained in an arbitration against a government, and in the event that the mining company prevails, what the odds are for actually getting paid. Obtaining answers to these questions at an early stage of a dispute places the mining company in the best possible position to vigorously prosecute its claim against the relevant government.

For established funders, one key criterion is whether the damages estimate for a case is realistic – that is, the value of the investment which has been expropriated by or targeted by a government’s breaching conduct. The decision whether to provide funding and to what extent, depends in large part on the estimate of that value. Thus, the underwriting and due diligence process for a litigation funder may often include obtaining a damages expert’s opinion, in addition to legal experts who might be asked to address legal questions regarding the case.

In the Indo Gold example, Indo Gold’s parent company Panthera Resources PLC in its stock exchange announcement on 25 August 2023 described the underwriting and due diligence process as a “detailed examination, supported by advice from multiple legal, mining and valuation experts.” With a litigation funder involved, the chances of success of a claim can only improve by reason of this rigorous assessment by the funder.

Moloney remarks that established funders can provide a value-add beyond the financing itself. This is why he views clients as partners, and that for Moloney, that approach has led to results: “When we fund international mining disputes, these are not just investments for us, but partnerships. We bring to the table not just the obvious financial backing that a funder provides, but years of experience and substantial expertise. We have already seen these investments bear fruit.”

In July 2023 in an arbitration on behalf of Perth-based Indiana Resources Limited against the United Republic of Tanzania financed by LCM, the arbitration tribunal ruled unanimously that Tanzania expropriated the company’s investment. The tribunal ordered Tanzania to pay US$76.7 million based on the fair market value of the project, plus interest and legal costs. Just this month, a panel at the International Centre for Settlement of Investment Disputes dismissed most of Tanzania’s grounds for annulling the arbitration award. In a stock exchange filing this month, Indiana Resources confirmed that the arbitration award is now worth US$ 120 million. This result was possible due to finance provided by LCM.

As to the imperfect storm of a rise in mining investments around the world in tandem with increased political risk, Moloney has these words: “Mining has always been a frontier industry, as we see in Australia. It is a high-risk sector but also provides the possibility of immense rewards. The mining sector will be an area of growth in the coming decades, but with that, also an area that will give rise to disputes. There is also immense opportunity there, a potential gold mine if you will, for litigation funders.”