WA Resources Update – April 2014

Welcome to the latest edition of WA Resources Update, your regular newsletter about key developments for the Western Australian mining sector. 

Project development – Iron Ore Off-take Agreements

By Michael Blakiston


In this current market where raising capital is difficult, particularly for bulk commodity projects requiring significant capital to fund infrastructure development, the entry into of off-take agreements ahead of production can represent a key component in developing a funding structure for such projects.

The off-take agreement can perform a number of functions, namely:

(a) provide comfort to the project lenders and other participants that the product is capable of being sold;

(b) provide a method by which a project sponsor can receive an upfront payment to assist in the funding of the project either from the sale of the off-take rights or via a prepayment for ore to be produced in the future;

(c) provide a basis on which equity participants can support project development where the off-take party provides a form of security for payment for the off-take; and

(d) provide credibility to the project, should the project be in a jurisdiction which is not known to have a mining culture.

Ultimately though, the off-take agreement must have financial credibility if it is to be of any value to the mining company. The commitment of the off-take will result in the project being less appealing to a range of potential project investors, usually industry participants, given they themselves invest in project developments to secure the off-take rights.

We have seen over the recent past, the eagerness of the Chinese to get involved in projects in order to secure their raw material supply chain. This is consistent with stated China policy on resource security and otherwise moving China’s dependency away from BHP, Rio and Vale as the source of iron ore for example. Therefore, there has been some competitiveness in the market to secure off-take.

Trading companies have been active participants in the market to obtain off-take. Some are already well established in iron ore while others have been striving to secure their entry and so they have been courting potential iron ore producers in order to secure their off-take in advance of project development.

In negotiating the off-take, the focus should be on price and the adjustments for impurities. When negotiated in the early stages of development, these factors require the parties to be flexible, given there will not have been close spaced drilling of the deposit, to ensure a predictable mine grade. At such a point in time, the variability of the ore body is not that well known and so agreeing to tight perimeters around grade and impurities, creates risk for the mining company.

Another key factor to consider when entering into off-take agreements at an early stage is knowing what level of production can be committed to the off-taker. Invariably for the off-take agreement to have value there needs to be a commitment to take a particular quantity and a financial consequence for not doing so. This has a down side in that if the mining company fails to produce the contracted quantity then it is in breach and as such will expose itself to damages.

Finally, for the off-take agreement to be valuable, the off-taker needs to provide some form of financial security to the mining company to support the agreement to acquire production. The mere commitment to acquire iron ore without there being certainty around payment devalues the commitment and as such, this will have implications for the project financing as the banks will invariably focus on the ability of the off-taker to pay for its purchase as the failure to pay will expose the mining company to default under their project facility.

Recent Agreement

Sundance Resources Ltd (Sundance) through its subsidiary companies Cam Iron SA and Congo Iron SA recently announced their entry into off-take agreements with Noble International Resources Pte Ltd (Noble International) with respect to their first 10 years of total production out of the proposed Mbalam Project in the Republics of Cameroon and Congo.

Some of the key issues identified above were the subject of detailed negotiation in order to ensure a balance between the commitment of Noble International as the off-taker and trader and the need for certainty and security which will assist Sundance to finance the Mbalam Project, a project requiring something in the order of $4.5B to develop.

Key features of these Iron Ore off-take agreements are:

(a) the off-take agreements are for a defined term and they commit all of the production to Noble International, subject to the subsidiaries having the right to clawback up to 50% of the production in order to make it available to parties that wish to invest equity in the Mbalam Project;

(b) the payments due under the off-take agreements are supported by advance payments from the off-taker, a parent guarantee and other potential credit support;

(c) the price is referenced to the Platts index with negotiated adjustments for impurities.  These negotiations focussed on the likely impurity levels identified in the feasibility study, with flexibility to take account of the level of impurities encountered through detailed mine planning and drilling; and

(d) Noble International taking the product, credit and shipping risk.

With the advent of commodities being priced to an index such as Platts, the mining company is exposed to the true market price for the commodity it is producing. Therefore, in negotiating the off-take, the mining company needs to identify the various risks it is facing and either accept those risks in order to maximise its return or trade off some of those risks for an adjustment in the return.

PNG Government, Oil Search and the UBS loan: what’s the lesson for investors

By Les Gavara-Nanu


Papua New Guinea’s resources sector has again come under the media spotlight following the PNG Government’s decision to obtain a PGK 3 billion (AUD 1.2 billion) loan from UBS Bank to finance a 10% share placement in Oil Search. The announcement of the deal prompted the nation’s Ombudsman Commission to take the extraordinary step of ordering a “freeze” on the loan pending investigations into allegations of impropriety. The Ombudsman’s actions were, however, too late as the loan had reportedly been drawn down, and the share placement completed, some two weeks earlier. Nonetheless, these developments serve as an important reminder for parties to exercise particular care when negotiating or drafting commercial agreements with Government. This article outlines some important contractual mechanisms that investors should consider.

Conditions precedent

An important area to consider will be the conditionality of the agreement and the approvals that will be required in order to give effect to the transaction. In the case of the UBS loan, some have argued - including most prominently, the former treasurer, Mr Don Polye, who has reportedly filed proceedings challenging the validity of the loan - that the loan should have been approved by the PNG Parliament and that the failure to do so was unconstitutional (see section 209(1) of the PNG Constitution). A specific condition precedent dealing with the issue of approval should therefore be considered such that the relevant agreement does not become binding or effective until approval has been obtained. A mechanism should also be considered to deal with what is to occur if the condition precedent is not satisfied (e.g. an automatic right of termination). Of course, the parties will need to be guided in this respect by local counsel as to the precise applicable legal requirements.

Warranties and indemnities

Warranties are an important means of contractual protection which, if drafted carefully, can be used by one party to effectively hold another party to a promise that a particular set of assumptions are true or accurate as at an agreed point in time (usually at the time of execution but, in some cases, also at completion). When dealing with foreign counter-parties, or in this case the PNG Government, it is important to consider the inclusion of a warranty that the relevant agreement, if entered into, will not be in breach of domestic laws. Such a warranty should be coupled by an indemnity to make good any loss or damage incurred by the recipient of the warranty if it is later found to be materially false or misleading. Depending on the nature of the agreement, the recipient of the warranty could also have a specific right of termination.


The disclosure of agreements dealing with the use or appropriation of public funds, or the discretionary exercise of power by public officials, should also be managed carefully. The private commercial interests of the parties involved need to be weighed against legitimate public interest concerns. Negative media coverage, even if unfounded, can have a profound detrimental impact upon the parties, including reputational damage. An agreement with Government should therefore include both a confidentiality provision and rules governing disclosure, such that any disclosure of the terms of the agreement (or matters relating to the agreement generally) by one party requires the approval of, or at least reasonable consultation with, the other party. As is often seen in commercial agreements, the obligation of confidentiality should be extended to apply to the “servants, agents and contractors” of the relevant parties as if they were a direct party to the agreement themselves. This mitigates the risk of unauthorised disclosure and provides a procedure for the orderly dissemination of market sensitive information.

Time of the essence

The parties may also wish to consider whether to make “time of the essence” in relation to the completion of the agreement or the performance of any other fundamental obligation under the agreement. A time of the essence clause will usually require the parties to perform an obligation by a time which is specified in the agreement, failing which the other party would have the right to terminate and claim damages (including, if applicable, liquidated damages). In the case of the UBS loan, the directive from the Ombudsman could have significantly delayed completion had it been made prior to the drawdown of funds. In such a case, the parties should consider what impact a failure to perform the relevant obligation will have on the parties and whether time should be made of the essence in that regard.

Financial security

Depending on the nature of the agreement, it may be necessary to include in the relevant agreement a mechanism by which payments may be secured (e.g. a bank guarantee, bond or overdraft facility). For example, payments due under a contract for the provision of services to Government, will usually require some form of security. It is not unusual, particularly in the case of emerging economies such as PNG, for payments to be delayed by Government entities over several months to allow for the raising of appropriate funds from treasury.

Termination and damages

Finally, in the event of breach, it is important to ascertain what steps will need to be complied with if an agreement is to be terminated and a claim for damages is made against Government. In PNG, for example, section 5 of the Claims by and Against the State Act requires notice of any claim against the State to be given within 6 months from the date on which the relevant cause of action accrued. A failure to give such notice can invalidate the claim altogether if it is to be brought before PNG courts (assuming the agreement does not spell out a dispute resolution procedure of its own (e.g. arbitration)).


As can be seen from the above, there are many issues that need to be taken into account when negotiating commercial agreements with Government entities. The PNG Government in particular has played, and continues to play, an active role in the development of the nation’s resources sector (as evidenced by the recent share placement in Oil Search). This creates a host of legal and practical considerations which are unique to PNG. That said, if structured the right way, with the right mechanisms in place, those issues can be dealt with under the relevant agreement in a very effective and comprehensive manner.

Wholly-owned subsidiaries: same same but different

By Mindy Bonomelli

Wholly-owned subsidiaries might exist for a number of reasons, whether it be for quarantining assets and liabilities, satisfying foreign legal requirements, tax efficiencies or as a result of an acquisition. 

A wholly-owned subsidiary is commonly viewed as an extension of the parent company and not treated as an individual company.  As a result, subsidiary governance can be regarded as unimportant or overlooked altogether.

In addition, a parent company will often appoint its employees as the directors of a subsidiary. Directors of wholly-owned subsidiaries might adopt a relaxed approach in performing his or her duties on the basis that the parent company is the sole shareholder of the subsidiary. 

However, directors of wholly-owned subsidiaries need to be mindful that their role is not perfunctory and carries with it important legal obligations.

While the obligations of a wholly-owned subsidiary and its directors will depend on the industry and jurisdiction in which the subsidiary operates, this note explores some of the responsibilities that apply to directors of a wholly-owned subsidiary,  the potential liability of a parent company in relation to a subsidiary and the importance of establishing a subsidiary governance framework. 

The subsidiary as a separate legal entity and the responsibilities of its directors 

Although a subsidiary might be wholly-owned, the subsidiary is a separate and distinct legal entity from the parent company. 

But what does this actually mean? Parent companies and directors of wholly-owned subsidiaries need to keep in mind the following: 

  • it is the role of the subsidiary’s directors, and not the parent company, to manage the affairs of a wholly-owned subsidiary. However, the parent entity (as the sole shareholder of a wholly-owned subsidiary) has the power to elect and remove the subsidiary’s board of directors; 
  • in making decisions affecting the subsidiary, the directors of the subsidiary are obliged to act in the best interests of the subsidiary - even where those interests conflict with those of the parent company or the broader corporate group. The obligation owed by a director of a wholly-owned subsidiary to act in the best interests of the subsidiary company takes precedence over the obligation of that director to act in the best interests of the parent company 
  • the directors of a subsidiary are subject to the statutory and regulatory duties under applicable local laws. This means they should be prudent in carrying out their responsibilities as a director and not regard their role as merely a nominal position. The statutory obligations of the subsidiary should be well understood by both the subsidiary’s directors and the parent company; and 
  • any governance practices for the subsidiary need to be consistent with the purpose for which the subsidiary was established. The risk profile of a subsidiary with its own operating assets and employees is very different (and much higher) to that of a subsidiary that is only a holding company.

Does the parent company have potential liability in relation to the subsidiary? 

Under Australian law, a parent company can be considered a shadow director of a subsidiary if it appoints its executives to the subsidiary’s board and expects those executives to exercise their powers in accordance with the instructions or wishes of the parent company. 

If the wholly-owned subsidiary is a foreign entity, a similar concept of shadow directors may be recognised in the country in which the foreign subsidiary is incorporated. 

This means that if the directors of a wholly-owned subsidiary are accustomed to acting on the instructions of the parent company, the parent company may be considered a “shadow director” of the subsidiary and essentially have the same obligations and liabilities as a director of the subsidiary, including liability for insolvent trading. 

In light of the above, a parent company needs to carefully consider what degree of control it wishes to exercise over its wholly-owned subsidiary. 

A subsidiary may be established with the specific intention of enabling a parent company to rely on the “corporate veil” to distance itself from potential legal liabilities that may arise in respect of a subsidiary company. In these circumstances, a parent company will look to demonstrate that the directors of the subsidiary operate independently and at arm’s length from the parent company. 

However, it may be the case that the parent company does not intend to distance itself from the potential risks and legal liabilities of the subsidiary. Instead, it may seek to minimise the risk of liabilities arising in relation to the subsidiary and its assets through careful control and direction of the activities of the subsidiary. In these circumstances, the parent company needs to be aware that the corporate veil could be “pierced”, meaning that the parent company itself might be considered a shadow director with the same obligations and liabilities as a director of the subsidiary.   

Is it worthwhile implementing a subsidiary governance framework? 

In light of the obligations of subsidiary directors and the potential liability of parent companies as outlined above, subsidiary governance frameworks are an important tool in facilitating risk management and ensuring compliance with applicable legal obligations. The additional benefits of a subsidiary governance framework can also include the following: 

  • defining the relationship between the parent and subsidiary 

Clearly outlining the relationship between the parent company and the wholly-owned subsidiary helps to improve transparency both within and outside the organisation. The subsidiary governance framework should allow the subsidiary to operate independently without adversely affecting the interests of the parent company. Clear financial and operational delegations of authority from the parent company should also be articulated. 

  • aligning corporate governance practices of entities within the corporate group 

Including key group-wide governance policies in the subsidiary governance framework will ensure that the subsidiary’s corporate practices are more closely aligned with the strategies of the parent company and assist in streamlining the business of the corporate group. However, in order to encourage engagement with, and effective implementation of, the framework, it is essential that any local differences, the subsidiary’s corporate culture and the reasons for the establishment of the subsidiary are taken into account. 

  • establishing a clear line of reporting between the subsidiary and the parent company 

If a parent entity is a public company listed on ASX, for example, it will be subject to continuous disclosure obligations. Setting out procedures to improve the information flow between a parent and a wholly-owned subsidiary will assist a listed parent company in complying with its continuous disclosure and reporting requirements. 

  • clarifying the rights and responsibilities of the subsidiary’s board and management 

The framework can include guidance and protocols on matters affecting the board and management including policies on conflicts of interest, board composition and procedures for board meetings. A comprehensive subsidiary governance framework will assist in educating and protecting officers and employees of the subsidiary in carrying out their respective responsibilities. 

Neglecting legal obligations and corporate governance at the subsidiary level can expose both the directors of the subsidiary and the wider corporate group to serious risks. It is therefore essential that the directors of a wholly-owned subsidiary entity are diligent in carrying out their duties and the importance of implementing an effective subsidiary governance framework is not overlooked. 


1.  In Australia, there is a concession in section 187 of the Corporations Act 2001 (Cth) which relieves directors of a wholly-owned subsidiary of the obligation of acting in good faith in the separate interests of that subsidiary if the following conditions are satisfied: (a)  the constitution of the subsidiary company expressly authorises the directors to act in the best interests of the holding company; (b)  the director acts in good faith in the best interests of the holding company; and (c) the subsidiary is not insolvent at the time that the director acts and does not become insolvent because of the director’s act.

A welcome modernisation: amendments to the Companies Act for the African countries of OHADA

By Callista Barrett

The amended Companies Act provides more flexibility and allows for more sophisticated corporate governance that updates a somewhat rigid and unforgiving Companies Act. Major changes include the introduction of a simplified joint-stock type of company, the codification of shareholders agreements, the introduction of varied share classes, convertible and subordinated bonds and interim dividends. 

The Uniform Act for Commercial Companies and Economic Interest Groups (Companies Act) that was originally adopted by the L’Organisation pour L’Harmonisation en Afrique du Droit des Affaires (OHADA) member countries in 1993 has been recently amended. Amendments were adopted by the member countries on 30 January 2014 and the revised Companies Act was published in the OHADA official gazette on 4 February 2014 with the amendments becoming effective on 5 May 2014. The revised Companies Act will apply to Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Republic of Congo, Democratic Republic of Congo, Equatorial Guinea, Gabon, Guinea, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo. 

Major changes 

The major changes in the revised Companies Act are: 

  • A simplified joint-stock type of company with limited liability, high flexibility and ease of governance has been introduced. This type of company is primarily governed by its Articles of Association and has few statutory restrictions. 
  • The revised Companies Act now expressly recognises shareholders agreements and sets out the types of procedures that may be agreed upon by shareholders, such as the management procedures, entitlements to share capital and relationships between shareholders. In addition, the revised Companies Act now states that provisions in shareholders agreements that are inconsistent with the Articles of Association or the Companies Act will be void. 
  • Corporate governance procedures have been updated and simplified, including allowing for video conferencing for general meetings and the delegation by shareholders of certain matters to the board. 
  • Companies will be able to issue different classes of shares, with classes of shares having different rights, convertible and subordinated bonds, interim dividends and issue free shares to its personnel. 
  • There are amendments to statutory requirements relating to the appointment and removal of statutory auditors, the types of information that must be provided to shareholders, the manner in which share capital is raised and share transfer procedures, including the exercise of pre-emptive rights over the transfer of shares. 

Third edition of the Corporate Governance Principles and Recommendations released

The ASX Corporate Governance Council (Council) has released the third edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations). The release follows a public consultation commenced in August 2013.

The third edition of the Principles and Recommendations takes effect for an entity’s first full financial year commencing on or after 1 July 2014. So, if you have a 30 June balance date, you should now consider whether you can comply with the new Principles and Recommendations, and, if necessary start putting in place any measures required to change your existing practices. 

The key changes between the second and third editions of the Principles and Recommendations are:

  • the inclusion of new recommendations relating to director appointment and disclosure of material exposure to economic, environmental and social sustainability risks; 
  • upgrading to the status of a recommendation some of the previous guidance in relation to director and company secretary appointments, director induction and professional development, auditor attendance at the AGM, disclosure of governance information, electronic communications with shareholders, and disclosure of internal auditor and/or risk management; 
  • enhancing the recommendations on risk management;
  • giving greater flexibility for companies (particularly smaller companies) to adopt and report on alternative practices for nomination, audit, risk and remuneration committees and internal audit;
  • facilitating reporting on diversity, where a listed entity also reports under the Workplace Gender Equality Act 2012 (but only where the listed company is the only employer in the group and all employees are in Australia); and 
  • expanding on the indicators of director independence. 

The Council has largely maintained the reforms proposed in the consultation version of the third edition of the Principles and Recommendations (consultation version), but has made changes in light of feedback received from respondents. 

Key changes 

Key changes in the final third edition to be aware of, compared to the consultation version, are:

  • Reporting gender diversity statistics. The consultation version contemplated that those listed entities that report annually to the Workplace Gender Equality Agency on six “Gender Equality Indicators” as required by the Workplace Gender Equality Act 2012 would be permitted to treat that reporting as meeting the recommendation to publish their gender diversity statistics. However, an entity’s ability to report on that basis is limited, as noted in a footnote highlighting the challenges that listed entities may face in reporting on that basis. The challenges include that the “Gender Equality Indicators” apply to individual employing entities and are not published on a consolidated basis across groups of entities, and do not apply to employees overseas. Therefore, even if you are a listed entity that reports annually under the Workplace Gender Equality Act 2012, if your corporate group includes employing entities that are not required to report, or you have overseas employees you will not be able to report meaningfully by simply referring to your “Gender Equality Indicators”. Therefore you will need to report your gender diversity statistics in accordance with recommendation 1.5(a)(c)(1). 
  • Board skills and diversity. Rather than a listed entity disclosing the mix of skills and diversity that the board is looking to achieve in its membership, recommendation 2.2 now states that a listed entity should have and disclose a board skills matrix which sets out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. 
  • Director independence. Box 2.1, which outlined the defining characteristics of an independent director in the consultation version, included a nine year period of tenure as an indicator that a director should no longer be considered independent. The reference to nine years has been removed in the third edition and replaced with a reference to a person having been a director “for such a period that his or her independence may have been compromised”. Other changes have also been made to the indicators in Box 2.1, which are now referred to as “Factors relevant to assessing the independence of directors”, reflecting that whilst the factors outlined are relevant, ultimately an assessment does need to be made by the board. 
  • CEO and CFO declarations on financial statements. Recommendation 4.2, which largely mirrored the declaration required under section 295A of the Corporations Act 2001 (Cth) in the consultation version, has been extended to include a declaration by the CEO and CFO that their opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. This effectively reinstates the requirement in recommendation 7.3 of the second edition of the Principles and Recommendations. 
  • Risk committees. Recommendation 7.1 in the consultation version recommended the establishment of a dedicated risk committee or a combined audit and risk committee. In the third edition, the reference to “risk committee” and the “audit committee” have been removed and the commentary amended to recognise that a listed entity may have a single board committee (such as a dedicated risk committee or a combined audit and risk committee) overseeing risk or a group of committees overseeing different aspects of risk. 
  • Sustainability risks. The recommended disclosures under recommendation 7.4 in relation to sustainability risks have been limited to situations where an entity has “any material exposure” to economic, environmental and social sustainability risks (each of which are now defined in the Principles and Recommendations). “Material exposure” is defined as a real possibility that the risk in question could substantively impact the listed entity’s ability to create or preserve value for security holders over the short, medium or long term. If a listed entity has material exposure to sustainability risks, it should disclose how it manages or intends to manage those risks. The commentary now clarifies that to meet recommendation 7.4, a listed entity is not required to publish a sustainability report. However, if an entity does publish a sustainability report, it can meet recommendation 7.4 by cross-referring to that report.  
  • Clawback of remuneration. Recommendation 8.3 in the consultation version sought to address reporting on an “if not, why not” basis, of the steps a listed entity had taken to claw back bonuses and other remuneration from senior executives where there had been a material misstatement of financial results in the entity’s financial statements. The Council has decided not to proceed with recommendation 8.3, and instead has included in the commentary to recommendation 8.2 guidance that disclosures about executive remuneration should include a summary of the entity’s policies and practices regarding the deferral of performance-based remuneration and the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity’s financial statements.
  • Alternative approaches for smaller listed entities. In the consultation version, the recommendations on nomination, audit, risk and remuneration committees were amended to include alternatives that recognise that the boards of smaller listed entities may reasonably decide not to establish committees and instead adopt alternative practices to address the issues that those committees would typically address. The ability to disclose alternative governance practices was also available instead of an internal audit function. This would enable those smaller entities to report that they comply with the recommendations, rather than “if not, why not” reporting. Whilst the term “smaller listed entities” was not used in the recommendations themselves, it was in the accompanying commentary. In the third edition the commentary has been amended to replace reference to “smaller listed entities” with “some listed entities” to reflect that it is not only the size of the entity that may be relevant, but also the nature of its business. 


The third edition of the Principles and Recommendations takes effect for an entity’s first full financial year commencing on or after 1 July 2014. Accordingly, entities with a 30 June balance date will be expected to measure their governance practices against the new recommendations commencing with the financial year ended 30 June 2015 and entities with a 31 December balance date for their financial year ending 31 December 2015. Early adoption is encouraged by the Council. 

There are changes needed to the ASX Listing Rules to give effect to the reforms in the third edition of the Principles and Recommendations. In particular, changes are required to give entities the ability to include their corporate governance statement in their annual report or on their website and a new Appendix 4G, which will provide a key to where a listed entity’s various corporate governance disclosures can be found. ASX will be making a separate announcement about those changes. It is expected that the Listing Rule changes will come into effect on 1 July 2014 and apply for an entity’s full financial year commencing on or after that date.