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Guide for international investment in Australia’s mining industry

31.07.2013

Investing in mining in Australia

Australia has a long history of international investment in mining projects in a variety of natural resources, including coal, iron ore, gold, copper, cobalt and others. International investors are a crucial part of the growth and success of Australian mining and mineral resources projects.

Moulis Legal is very happy to provide this international investor guide to the Australian mining industry.

This guide is designed to provide international investors with an introduction to Australia’s mining industry, to assist investors with investigating and preparing for your investment.

Moulis Legal has a proud history of working with industry and investors in Australia and across Asia.

Moulis Legal has the knowledge and experience to provide you with the necessary legal guidance to work towards making your investment into Australia a success.

Moulis Legal is a member of AMPLA, the Resources and Energy Law Association.

We invite you to contact us with your questions and we wish you all the best with your new investment.

Disclaimer This document is intended as a guide only,  and is not intended to provide the reader with legal, financial or investment advice on any of the subject matter covered in this document. This guide is a summary only, and is not a comprehensive description of all relevant matters to be considered by prospective investors. Prior to making investment decisions, you should obtain professional legal, financial and investment advice.

Australia’s legal system

Three Levels of Government to Consider

Australia has a central national government, as well as individual governments responsible for governing and law making in Australia’s six states and three territories, and local governments responsible for managing cities and regions.

National (Commonwealth) Government

Australia’s national government is called the Commonwealth Government, and is located in Canberra, Australian Capital Territory. Under the Constitution of Australia, the Commonwealth Government is empowered to make laws in relation to a limited list of subject areas (generally, subject areas with national or international significance).

There are a number of Commonwealth Government laws and regulations that impact on mining in Australia, including international investment approval, taxation and environmental oversight.

State Governments

Australia has six states: New South Wales, Victoria, Queensland, South Australia, Western Australia andTasmania.

Each state has its own government, which under the Constitution of Australia is responsible for making laws in all areas not covered by the CommonwealthGovernment.Ifthereisanyconflict between a Commonwealth and state law, then the Commonwealth law will prevail.

State laws have the most significant impact on mining in Australia because the states own almost all of the minerals within each state. Each state has its own regime for managing exploration, mining, leasing, royalties, safety and environmental approvals.

Territory Governments

Australia has three territories: Australian Capital Territory, Northern Territory and Norfolk Island. Each territory has its own government system. Territory laws are subject to oversight by the Commonwealth Government.

Territory laws have the most significant impact on mining in Australia because the territories own almost all of the minerals within each territory. Each territory has its own regime for managing exploration, mining, leasing, royalties, safety and environmental approvals.

LOCAL Governments

Across Australia local governments have responsibilities for the management of each city and region. Local governments are relevant to mining projects in a number of areas, including the approval of certain property developments and the commercial use of certain local roads, facilities and services.

Council of Australian Governments (COAG)

The Council of Australian Governments (COAG) is an intergovernmental organisation in Australia which consists of:

  • the Federal Government, represented by the Prime Minister;
  • the State and Territory Governments, represented by respective Premiers and Chief Ministers; and
  • the Australian Local Government Association, represented by its President.

The role of COAG is to initiate and develop reforms of national significance, and reforms which require the cooperation of the federal, state, territory and local governments. COAG can impact on mining projects through streamlining of regulatory requirements and approvals processes between jurisdictions.

Mining licenses

Identifying, Obtaining and Maintaining the Right License

Mineral resources in Australia are generally owned by the State or Territory where the minerals are located.

Each state and territory government is responsible for granting and overseeing all licences to explore and produce (extract) certain minerals within its borders. A licence entitles the licence holder to an exclusive right to explore, maintain or extract specific minerals within the boundaries of the licence area. An area may be subject to licences for different minerals held by different companies.

Holders of licences must negotiate for access to land in order to exercise their rights to explore or extract minerals under the surface of the land. This usually involves formal agreement with the landholder and the payment of compensation. Legislation dictates how this is done.

Mining licences in each state and territory are different. Each state and territory maintains a registry of licences, which allows the public to identify the holder of a licence and certain details of the licence. Reviewing the status, conditions and limits of a mining licence is an important element of due diligence by investors.

There are two key categories of mining licences in Australia:

  • Exploration licences that provide for exploration activities.
  • Production licences that allow for extraction of specified minerals.

Some states and territories also offer retention leases that allow an area to be retained until production becomes commercially viable.

Exploration Licence

An exploration licence entitles the holder to undertake exploration activities to identify mineral resources within a designated area.

An exploration licence is granted for a period of 5 years, although periods may vary between different states and territories. An exploration licence may be renewed.

Conditions attach to exploration licences, including obligations to:

  • undertake certain work activities
  • expend a minimum amount of funds
  • report to the government on exploration activities – pay rent on the licence

Rights granted to the licence holder include:

  • entry to the land (subject to negotiation with the landholder)
  • appraisal activities (drilling for core samples)
  • generally, a priority right to apply for a production licence for minerals in the licence area

Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the exploration licence being forfeited.

Mining License

A production licence entitles the holder to extract, develop and sell minerals from within the licence area. Generally, a party holding an exploration licence over an area will have the first option to apply for a production licence in respect of the specific mineral deposits within the licence area.

A production licence is granted for a limited period, which is set out in the relevant state or territory law. A production licence may be renewed.

Conditions attach to production licences, including obligations to:

  • pay royalties and minerals rent resource tax (if applicable)
  • pay rent on the licence
  • undertake certain work activities
  • report to the government on exploration and production activities

Rights granted to the licence holder include:

  • entry to the land (subject to negotiation with the landholder)
  • selling extracted minerals (royalties must be paid)
  • constructing and operating production infrastructure (additional approvals and permits will be required)

Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the production licence being forfeited.

Retention Lease

When an exploration licence holder makes a discovery but it is not commercially viable to extract the minerals at that time, the licence holder may apply for a retention lease.

A retention lease preserves the interests of the licence holder against other parties seeking to undertake production or exploration in the area for a specific period. The retention licence may be amended or forfeited if the extraction becomes commercially viable.

During the period of the retention licence the licence holder must:

  • pay rent on the licence
  • under take certain work activities (if applicable)
  • report to the government on the commercial viability of extracting the minerals

Failure to comply with obligations and regulations can lead to penalties being imposed by the state or territory regulator, and can even result in the retention licence being forfeited.

Investment vehicles

Choosing the Best Way to Invest and Setting it up Correctly

Joint Ventures

Traditionally most mining projects in Australia have been conducted using a joint venture structure; either as an incorporated joint venture, or unincorporated joint venture.

The following table summarises the key features of both an incorporated joint venture, and an unincorporated joint venture.

INCORPORATED JOINT VENTURE
Description This structure uses a company as the project vehicle and each party holds shares in the company, known as a Special Purpose Vehicle.
Control The constitution of the Special Purpose Vehicle sets out provisions for voting and decision making. Most strategic decisions will be made by a board of directors that is voted in by the shareholders.The Special Purpose Vehicle and the board of directors must comply with corporations laws.
Revenue The profits of the Special Purpose Vehicle are distributed to the shareholders as dividends.The Special Purpose Vehicle is a separate legal entity for taxation purposes. If the Special Purpose Vehicle suffers financial losses, then those losses cannot be offset against the shareholder’s own income.
Ownership The interests in the joint venture are held through shares in the Special Purpose Vehicle.
Withdrawal A party may withdraw from the joint venture through the transfer of its shares in the Special Purpose Vehicle. The constitution may include special provisions relating to the transfer of shares.
Operations Operation of the joint venture is set out in the constitution of the Special Purpose Vehicle.
UNINCORPORATED JOINT VENTURE
Description The joint venture is not a separate legal entity. The joint venture is established and managed in accordance with a joint venture contract.The joint venture contract defines the rights, interest and obligations of each party.

Each party’s participating interest in the joint venture is defined and protected under the joint venture contract.

Control The joint venture is controlled by the parties to the joint venture contract. The joint venture contract will usually include provisions for decision making, establishing a committee of the joint venture parties and voting procedures.
Revenue The joint venture is not a separate entity for taxation purposes, and the parties take their interests and losses directly from the joint venture.Each party takes its share in production in kind. Each party may then sell or dispose of that product independently.
Ownership Each party owns its share of the joint venture in accordance with the party’s participating interest.
Withdrawal The joint venture contract may include provisions regarding the transfer of a participating interest, such as pre-emptive rights.Transfer of an interest usually requires government approval.
Operations The joint venture parties usually appoint one of the parties (or a third party) to operate the joint venture in accordance with the joint venture contract.
Corporations in Australia

International investors generally use one of the following corporate structures to hold assets and enter into joint venture arrangements:

  • Private company
  • Public company
  • Registered Australian branch of a foreign company

The Commonwealth Government administers rules and regulations relating to each of these corporate entities, including in respect of establishment, registration, reporting obligations, director duties, taxation and deregistration.

Foreign investment approval

Navigating the Notification and Approval Process

Foreign investment into Australia is overseen by the Foreign Investments Review Board (FIRB). The role of the FIRB is to examine proposals by foreign persons to undertake direct investment in Australia and to make recommendations to the Government on whether those proposals are suitable for approval under the Government’s policy. Certain types of investments require approval from the Commonwealth Government Treasurer.

Under the Foreign Acquisitions and Takeovers Act 1975, investments by foreign persons must be notified to Foreign Investments Review Board if the investment meets certain requirements. A foreign person includes a company owned by foreign individuals, a foreign state owned enterprise, and also an Australian subsidiary of a foreign company.

Notification must occur prior to the investment taking place or the commencement of the new business.

Investment in mining projects may require notification to the Foreign Investments Review Board depending on:

  • whether the licence provides rights in respect of ‘urban land’
  • the length or term of the licence
  • exclusivity of the rights in respect of the land

Investors should review each investment to assess whether a notification to the Foreign Investments Review Board should be made. This review should include a review of all of the assets and rights that will be acquired as part of the investment.

Notifications to the Foreign Investments Review Board are considered by the Commonwealth Government Treasurer. The Treasurer is required to make a decision within 30 days of receiving a notification, unless an interim order is made giving a 90 day extension.

The Treasurer may attach conditions to certain investments, which may be subject to negotiation. In certain cases the Treasurer can prohibit an investment if it is found to be contrary to the national interests of Australia.

Royalties, duties and taxes

Three Levels of Taxes to Consider

Taxes, royalties and duties will be applicable to mining projects and investments. Taxes, royalties and duties are imposed by each of the three levels of government.

Detailed consideration and calculation of the specific taxes, royalties and duties applicable to a mining investment should be included in your investment analysis.

Commonwealth Government

The Commonwealth Government can impose customs and import duties, mineral rent resource tax, fuel tax, withholding tax, income taxes and goods and services tax.

State and Territory Governments

State and territory governments can impose resource royalties, stamp duty, land tax and payroll tax.

Resource royalties are calculated differently in each state and territory in accordance with specific laws and regulations.

Stamp duty is imposed by each state and territory, and is calculated in accordance with each state and territory’s own laws and regulations. Some states now impose stamp duty on the transfer of certain energy and resource licences.

Local Governments

Local governments collect rates in respect of land, which may be payable on certain mining projects.

Health, safety and the environment

A Central Part of Each Mining Project

Investment into mining in Australia is impacted by Commonwealth, state and territory laws in relation to health, safety and environment.

Health and Safety

Health and safety of employees working on mining projects is strictly managed in Australia. Health and safety on mining projects is governed by a national employment system and industry specific regulations.

Owners, managers, supervisors and employees on mining projects must comply with strict health and safety rules relating to:

  • risk identification
  • reporting risks and incidents
  • qualifications and safety training
  • security and prohibited substances
  • insurance and compensation
  • compliance with safety audits and inspections
  • compliance with various industry standards and/or codes of practice
Environment

Environmental assessment, approvals and compliance are critical to all mining projects in Australia and must be carefully considered by investors.

Environmental assessment and approval is generally governed by state and territory laws and regulations. Depending on the size, significance and impact of each proposed mining project the state or territory regulator may require an environmental assessment be undertaken in respect of:

  • impact on wild life and habitats
  • impact on flora, vegetation and land
  • air and noise pollution
  • managing the use and protection of water resources

Assessments are prepared by project proponents, often in conjunction and consultation with the relevant regulatory body. On completion the assessment is often subject to public consultation, and members of the public may be able to lodge objections to certain aspects of the project or environmental assessment.

A determination regarding environmental approval of a mining project is usually the responsibility of the relevant state or territory government minister. In some states and territories an appeals process is available in certain circumstances.

Water is a particular concern in certain Australian states and territories and is carefully managed. Water is a critical element in mining projects, and so water use, management and protection regulations need to be carefully considered.

Commonwealth

In addition to state and territory environmental regulation, the Commonwealth Government Department of Sustainability, Environment, Water, Population and Communities is concerned with environmental matters of national significance.

Certain mining projects will require an environmental impact assessment and approval by the Commonwealth Government pursuant to the Environment Protection and Biodiversity Conservation Act 1999.

Access to land and infrastructure

Special Rules Can Apply and Should Be Investigated

Access to land and infrastructure is different across Australia, and investors should investigate how applicable regulations may impact on their mining investment.

Land Access

Access to land in Australia to undertake mining activities is controlled by state and territory governments, and is different for each state and territory.

Access to private land must be negotiated with the landowner, and may require the payment of compensation for:

  • access to the land
  • damages and improvements to the surface land – loss of use of the land
  • loss of earning and enjoyment of the land

Access to land owned by the Commonwealth Government or a state or territory government is different depending on the nature of the land and where it is located. Special permission may be required for access to this land, and restrictions may be imposed for conservation, agricultural and cultural reasons.

Infrastructure Access

Australia has Commonwealth, state and territory regimes that impact on access to private and public infrastructure, such as ports, railways and transport infrastructure.

The National Competition Council of Australia (NCC) is a research and advisory body established by agreement of the Council of Australian Governments (COAG). Its main function is to make recommendations on the regulation of third party access to services provided by monopoly infrastructure. The NCC has the power to ‘declare’ certain public and private infrastructure facilities. If an infrastructure facility is ‘declared’ then third parties have the right to negotiate with the facility owner to gain access to the infrastructure facility.

Investors should investigate key infrastructure facilities that may be applicable or required for a mining project and how the access regime may impact on each facility.

Native title and cultural heritage

Investigations Must Be Undertaken

Native title is the common law recognition of rights and interests of Aboriginal peoples or Torres Strait Islanders, arising pursuant to their traditional law and customs.

Australia has a national system for the recognition and protection of the traditional connection of Aboriginal people and Torres Strait Islanders to the land, and to areas and objects of cultural significance.

Most states and territories have regimes that complement the national system.

Mining licence and lease holders must obtain approval prior to undertaking certain activities in a native title or cultural heritage area. Approval usually requires direct engagement with the traditional owners of the land.

The rules surrounding native title and cultural heritage in Australia have changed in recent years and investors must ensure that a mining project has complied with all relevant obligations.

Investors should undertake detailed investigations to identify whether native title and cultural heritage obligations exist in respect of a mining project, and whether obligations have been satisfied.