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

2015 in Review: the 10 things our clients have taught us over the past 12 months

By Justin Little

Whilst there are exceptions to every broad generalisation, it is universally acknowledged that 2015 has been a difficult year in the mining and resources sector. 

Lower commodity prices have wreaked havoc across the industry and whilst the responses have not been completely uniform, we have seen the implementation of drastic cost-cutting measures to preserve dwindling cash reserves, the sale of both core and non-core assets, emergency capital raisings, staff reductions, mine closures, the cessation or winding back of exploration programs and, in some extreme cases, the appointment of external administrators. 

We are fortunate at Gilbert + Tobin to act for a wide variety of clients, across a broad array of commodities and at different ends of the corporate spectrums. We have listed below some of the things that they are witnessing, some of the issues that they are confronting and some reasons for optimism as we turn the page on another year.

1. The issues in the market are cyclical and not structural

Whilst there is little doubt that the “mining boom” is over, the resources sector has always operated in cycles and that premise still remains the case today. As a rule, the market is efficient and generally gets it right, although as A. G Shilling once commented, “it is possible that markets can remain irrational for longer than some companies can remain solvent”.

2. We haven’t seen the end of the impact of the wealth transfer to China

Australia remains very well positioned to catch the next wave of investment from Asia and our clients are continuing to see interest from China and other Asian markets for their commodities and the projects that underpin them. This interest is driven by a longer term view of the market fundamentals than most company shareholders are willing to tolerate.

3. Exploration and development funding is likely to remain scarce for the foreseeable future
This remains a fundamental concern in the industry – exploration grows the next wave of project developments and provides the learning portal for the next generation of geologists, metallurgists and mining engineers. More incentives are required to attract companies to part with their exploration dollars and exploration success alone is no longer enough.

4. Boards are nervous
Every decision, investment, non-investment, disclosure, omission from disclosure, financial statement and forecast is subject to greater scrutiny than ever before. Litigation funders await any misstep. Given that there is not a one size fits all approach to dealing with the current commodity downturn, boards are now wanting more information than ever before and are asking more and more from their management teams.  

5. Forecasts are just that, forecasts

Whilst few, if any, were able to predict the current commodity price collapse, there are likely to be fewer still that will accurately predict its recovery. What this tells us is that although there are now a few commentators, analysts and industry experts trying to predict the bottom of the cycle, the truth is that no-one really knows.  

6. The regulatory burden on resources companies seeking to get a project into development remains an industry-wide problem

The complexity of the approvals system and the time-frames involved in seeking and obtaining a myriad of project approvals is an additional obstacle that clients face in attracting capital to fund their projects.  This is a problem when times are good, it is an even bigger problem when coupled with lower commodity prices and cautious investor sentiment.

7. Innovation is key

Many industry participants and observers may have heard the recent remarks by Prime Minister Malcolm Turnbull, that the future of Australia lies not in what is in the ground but what is in our heads. Whilst many may disagree with this general assertion, it is in part true as it applies to the resources sector itself. Australian companies are now working harder at becoming more efficient and more productive, and innovation and technology are at the core of these changes.  We are seeing greater use of automation, smart computing and data analytics allowing Australian resources companies to compete on a global stage in a lower commodity pricing environment.

8. Resource companies and investors remain cautious about M&A transactions

Whilst transaction values may have been re-set in recent times and interest in M&A transactions appears to be rising, deals are taking more time to launch and to execute as investors (and their boards and management teams) spend longer considering the relative merits of each transaction.

9. The great rate gouge

Our clients remain concerned about the ability (and increasing propensity) of local shires to "rate gouge” mining companies through constant increases in local shire rates notices in order to cover budget shortfalls. We are supporting industry action to address this unfair financial impost on mining companies.

10. Mining has always been a risky business
Whilst it is understood that the rewards can be great, there has never been a moment in time where every participant has enjoyed success. It is just that in the current cycle there are far fewer winners. We share in the belief that this is an industry that maintains a unique capacity for resilience, for adaptation, for innovation and for growth.

When you get that pre-emptive feeling, you may need to tread carefully with your dealings

By Emma Mcleod and Claudia Henfry

The decision earlier this year in Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd1 is a timely reminder to be careful in drafting and complying with pre-emptive rights clauses.

The decision earlier this year in Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd1 is a timely reminder to be careful in drafting and complying with pre-emptive rights clauses.


In 2010, Santos Offshore Pty Ltd (Santos), Apache Oil Australia Pty Ltd, Apache East Spar Pty Ltd and Apache Kersail Pty Ltd (together the Apache Parties) entered into a Sale and Purchase Agreement and a Joint Operating Agreement (JOA) in relation to a Petroleum Retention Lease (later converted into a Petroleum Production Licence). 

In April 2015, Viraciti Energy Pty Ltd (Viraciti) entered into an agreement with Apache International Finance II SARL, Apache Finance Pty Ltd, Apache Ravensworth Corporation LDC and certain other companies under which, amongst other things, Viraciti acquired all of the shares in Apache Energy Limited, the parent of the Apache Parties. 

Clause 12.3 of the JOA confers a pre-emptive right on the parties to purchase the interest of another party in the joint venture in the event that there is to be, amongst other things, a change in control of that party.

Clause 12.3 of the JOA established the procedure that was to be followed in the event of a change in control of any party.  The clause required the Apache Parties to issue a notice to each of the other JOA parties (i.e. Santos) that disclosed the final terms and conditions as were relevant to the Apache Parties’ participating interests and the Apache Parties’ determination of the ‘Cash Value’ of their participating interests. 

Santos would then have a right to acquire the Apache Parties’ participating interests on certain terms and conditions. 

On 15 May 2015, the Apache Parties each issued a notice to Santos (Notices) on substantially identical terms.  The Notices purported to comply with the requirements of clause 12.3 of the JOA, advising of the proposed change in control and offering to sell their relevant participating interests in the JOA to Santos on the terms and conditions set out in the Notices.  Santos claimed that a number of the conditions failed to comply with clause 12.3 of the JOA, and on this basis the Notices were invalid.  Santos sought a declaration to that effect and orders requiring the Apache Parties to specifically perform their obligations under the JOA by issuing Notices in compliance with clause 12.3 of the JOA. 

The decision

Justice Pritchard held that each of the Notices failed to comply with the requirements of clause 12.3 of the JOA and were invalid. Further, her Honour found that the invalid terms and conditions in the Notices could not be severed from the Notices and accordingly the Notices were entirely invalid.2

In making her decision, Justice Pritchard noted that the courts have recognised the need for caution in adopting a construction of pre-emptive rights clauses that would restrict their operation or permit their application to be avoided and thus erode the benefit conferred by the grant of a right of pre-emption.3   

For the same reason, pre-emptive rights clauses have been construed so as not to render it impossible for a joint venturer to satisfy the requirements of the offer.4

In determining the meaning of clause 12.3 of the JOA, Justice Pritchard found: 

  • The ‘final terms and conditions as are relevant to the participating interests’ will be those which bear upon, or operate upon, or are otherwise closely connected or related to, the participating interest, and to its acquisition by the acquiring party.5
  • The phrase ‘on equivalent terms and conditions set out in the notice for cash’ operates in relation to the determination of consideration to be paid for each participating interest.  It applies so as to result in an equivalent cash price for the acquisition of each participating interest, rather than in such other form of consideration as may have applied.6
  • The only modifications which may be made to the terms and conditions are modifications:

(a) that are necessary to reflect the fact that the offer in the notice is an offer by the acquired party to sell only the participating interest to the other parties to the JOA; and 

(b) that make it clear that the participating interest will be acquired for cash, rather than on the basis of another form of consideration as may have been contemplated.7  


It is important to remember that the precise terms of a pre-emptive right clause must be considered and complied with when a party is required to issue a pre-emption notice.  Failure to strictly comply with these contractual requirements may lead to lengthy, costly and unnecessary litigation. 


1 [2015] WASC 242.
2 Ibid [3] and [117].
3 Beaconsfield Gold NL v Allstate Prospecting Pty Ltd [2006] VSC 320 [34].
4 THL Robina Pty Ltd v The Glades Golf Club Pty Ltd [2004] QSC 461 [49].
5 Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242 [54] – [61].
6 Ibid [62] – [70].
7 Ibid [71] – [74].

Over, under, around and through: paying the "Iron Price" - obligations to pay an iron ore royalty 

By Mark Gerus and Lauren Shave

Contract – Iron ore royalty - Construction of terms – Meaning of phrase "deriving title through or under".

In George RR Martin’s series of novels “A Song of Ice and Fire”, adapted by HBO for television as “Game of Thrones”,  paying the “iron price” has a typically bloodthirsty connotation. Without going into gory detail, it refers to acquiring something at, let’s just say, a high cost. 

The “iron price” is very much a part of the local nomenclature in Western Australia, though (more recently) for the opposite reason. However, a recent High Court decision had all the makings of an epic novel: two well-known names, a long battle and, in the end, perhaps a sense of at least one party having paid a heavy price by reason of a royalty agreed to back in 1970. 

On 14 October 2015, the High Court of Australia delivered its decision in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited; Wright Prospecting Pty Limited v Mount Bruce Mining Pty Limited[2015] HCA 37.

Both parties had appealed decisions of the Court of Appeal of New South Wales. An interesting aspect of the decision concerns the High Court’s findings as to the meaning of the phrase “deriving title through or under” in a royalty agreement.
On 5 May 1970 Wright Prospecting Pty Ltd, Hancock Prospecting Pty Ltd (together, Hanwright), Hamersley Iron Pty Ltd and Mount Bruce Mining Pty Ltd (MBM) entered into an agreement (1970 Agreement) whereby MBM acquired from Hanwright the entire rights in relation to the MBM Area. Royalties were payable to Hanwright on “ore won by MBM from the MBM Area.” The obligation to pay royalties extended to “all persons or corporations deriving title through or under” MBM to the MBM Area. This was because “the Purchaser” was defined to include “[MBM], its successors and assigns and all persons or corporations deriving title through or under the Purchaser to any areas of land in respect of which an obligation to pay any amount has arisen or may arise.”

The Court had to decide whether the Channar Joint Venturers were “persons or corporations deriving title through or under” MBM to the area known as Channar A. That area is now held by the Channar Joint Venturers. One of the Channar Joint Venturers is Channar Mining Pty Ltd, a wholly owned subsidiary of Hamersley Holdings Pty Ltd and part of the Hamersley group.  

This question presented the Court with a “constructional choice”: was the phrase “deriving title through or under” limited to succession, assignment or conveyance, or was it broad enough to cover a close practical or causal connection between the rights exercised by the Channar Joint Venturers and the rights which MBM obtained from Hanwright under the 1970 Agreement? 

The Court favoured the wider construction because:

  • it was consistent with the purpose of objects of the agreement between Hanwright and MBM. The Court noted that the relevant clause did not refer to deriving title “from”, but rather to deriving title “through or under”, which is a relatively flexible expression. Further, the inclusion of the words “successors and assigns” in the definition of “Purchaser” meant that “deriving title through or under” had to refer to something other than succession, assignment or conveyance;  
  •  the surrounding circumstances supported the wider construction. For example, the Court found that, when the 1970 Agreement was executed, the MBM Area was defined by reference to temporary reserves, which the parties knew permitted temporary occupancy for mineral exploration purposes, but the obligation to pay the royalty arose when ore was won from that area. In other words, the 1970 Agreement was drafted on the basis that it was unlikely that title, in a legal sense, to the temporary reserves included in the MBM Area would remain static;
  • it accords with commercial reality. The Court considered that the extent of an ore body is unknown and work on one area is often dependent on work undertaken on an area adjacent to or near another area the subject of current exploration. After the allocation of the MBM Area to MBM, it was the Hamersley group that had control over by whom, where and when the MBM Area was developed. The price to be paid was that when ore was won from the MBM Area "through or under" MBM, a royalty was payable to Hanwright.

In reaching its decision, the High Court summarised the following settled rules of contractual construction:

  • the rights and liabilities of parties under a provision of a contract are to be determined objectively, by reference to its text, context and purpose; 
  • in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. This will require consideration of the language used in the contract, the circumstances addressed by the contract and the commercial purpose or vobjects to be secured by the contract; 
  • ordinarily, the process of construction is possible by reference to the contract alone. If an expression in a contract is capable of only one meaning, evidence of the surrounding circumstances cannot be adduced to contradict its plain meaning; 
  • sometimes it is necessary to consider events, circumstances and things external to the contract. For example, the court may need to understand the genesis of the transaction, the background, the context, and the market in which the parties are operating, in order to identify the commercial purpose or objects of the contract. It may also be necessary in determining the proper construction where there is a constructional choice (as there was in this case); 
  • the court cannot consider evidence of the parties' statements and actions reflecting their actual intentions and expectations; and 
  • unless a contrary intention is indicated in the contract, a court is entitled to assume that the parties intended to produce a commercial result. A commercial contract should be construed so as to avoid it making commercial nonsense or creating commercial inconvenience. 

The Court distinguished a previous decision, Sahab Holdings Pty Ltd v Registrar General (No 2) (2012) 16 BPR 30, which concerned the statutory phrase “any person claiming through or under that person” in theReal Property Act 1900 (NSW). The question in that case was whether title to land acquired by registration of a transfer could be said to be claimed through or under the previous holder of the title to the same parcel of land. The Court observed that the statutory provision in question in that case assumed the possibility of succession to title between registered owners. The Court found that this was entirely different to the 1970 Agreement, which made it “tolerably clear” that the reference to title derived “through or under” MBM did not require a title acquired from MBM via an unbroken chain of title over Channar A linking the present owners to MBM. 

This case is instructive as to the meaning of “deriving title through or under” (or similar phrases) in royalty agreements between mining companies. More broadly, though, the case highlights the importance of context where there is an ambiguous phrase in a contract. It is preferable not to have any ambiguous clauses when negotiating the terms of an agreement but, if that cannot be avoided, it is advisable to bear in mind the rules set out above. Courts will use them to interpret ambiguous clauses and, as can be seen from this decision, the consequences can be significant if the court takes a different view about what a clause means. 

NEWSFLASH - new foreign investment rules

New foreign investment rules came into effect in Australia on 1 December 2015.  The basic process (including a 30 day examination period and a 10 day notification period) remains the same, but there are a number of important changes to the way Australia’s foreign investment screening regime works, including the imposition of significant fees for each application.
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