Accessing Chinese solutions for mining clients

Transcription

1 Accessing Chinese solutions for mining clients financial institutions ENERGY infrastructure AND COMMODITIES Transport technology

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3 Accessing Chinese solutions for mining clients A NORTON ROSE GROUP GUIDE NOVEMBER 2010

4 Accessing Chinese solutions for mining clients

5 Contents 06 Introduction 07 China Export & Credit Insurance Corporation (SINOSURE) 10 Accessing Chinese bank/eca facilities 15 Resource M&A transactions involving Chinese investors 24 Enforcement issues when dealing with Chinese counterparties 35 Observations on dealing with Chinese entities 46 Norton Rose Group: track record 53 Contacts

6 Accessing Chinese solutions for mining clients Introduction Norton Rose Group has been regarded for many years as having one of the leading legal practices servicing the mining sector. The mining sector was one of the hardest hit by the credit crunch. Share prices of corporates plummeted as a result of a mixture of drops in commodity prices and the absence of debt for further mine developments. As is usual in such situations the market has simply adapted. We have seen a massive increase in the number of export credit agency (ECA) financings supported by Chinese banks. Further we are now seeing a real increase in the number of acquisitions of existing mining businesses or stakes therein by Chinese State Owned Enterprises. Given the fact that we have one of the leading China practices this has led to a huge increase in the number of China mining mandates. We are delighted to say that we have a dedicated China mining team. Not only do we act for multinationals on China related matters but we also act for the Chinese counterparts on international deals. This we believe gives us a particular insight into the new world. The scale of our China mining practice has expanded when Deacons Australia joined us, from 1 January Our combined teams will offer our clients added insight and expertise. At the request of clients and contacts we have pulled together a series of articles intended to provide a framework within which to assess options for non-chinese clients. Again we believe it is the only guide of its kind focused on accessing Chinese capital for mining. In tandem with this guide we have provided a seminar on this topic. For those that feel they would benefit from further information we are happy to offer discrete training on all matters related to mining and accessing Chinese finance. 06 Norton Rose Group November 2010

7 China Export & Credit Insurance Corporation (SINOSURE) China Export & Credit Insurance Corporation (SINOSURE) SINOSURE is the official export credit agency of the People s Republic of China (PRC). It was established in 2001 and took over roles previously filled by People s Insurance Company of China and The Export-Import Bank of China (C-EXIM). C-EXIM still has a significant role however, it is not an official ECA, but is regarded as a policy bank providing support (in the form of direct funding) to the economic/political policies of the PRC. It was not until 2003 that SINOSURE began writing policies covering classic ECA export risks commercial credit risk and political risk. Like many ECAs the bulk of SINOSURE s business is in short term support for Chinese exports, however its medium and long term underwriting has grown substantially over the years and exponentially over the last 12 months all very much in line with the Chinese government s stimulus package for the economy. SINOSURE has representative offices and branches across China and it is to the local office that the Chinese exporter will usually address its initial request for cover. A foreign project company seeking SINOSURE support for its project due to, for example, the involvement of a Chinese equipment supplier/epc contractor, will need to access SINOSURE through its financial adviser or the relevant Chinese equipment supplier/ EPC contractor the foreign project company will not itself have direct access. This application process is typical of access to other ECA cover. Requests for medium and long term SINOSURE cover are processed through the head office in Beijing and are subject to approval by the Ministry of Commerce (MOFCOM) for cover in excess of USD30 million and by the State Council for cover in excess of USD100 million. Discussions with SINOSURE are usually begun by the Chinese equipment supplier/ EPC contractor and taken up by the bank arranging the credit facility. There is usually little or no contact with the foreign entity. China is not a participant in the OECD gentlemen s agreement on official support for export credits (the Consensus) but SINOSURE is nonetheless represented at the Berne Union and complies with the Consensus. Norton Rose Group November

8 Accessing Chinese solutions for mining clients SINOSURE provides up to 95 per cent cover for political risks and has traditionally limited commercial risk cover to 50 per cent, however in the current market there is now some flexibility in the level of cover for commercial risks. The percentage of cover is run against the amount of the contract value which SINOSURE is able to support ie, up to 85 per cent of the total contract value, in common with other ECAs. SINOSURE cover is available for both Chinese and foreign banks who meet certain criteria (including a track record in export credits), although the foreign bank must have a branch in PRC (a representative office is not sufficient). As with all export cover SINOSURE cover is only available in support of exports of the host country ie, Chinese goods and services. This can be a flexible concept but the Chinese content should be at least 70 per cent of the value of the export contract/project. The greater the Chinese connection to the project (in terms of economic interest for the PRC), the better the chance of obtaining cover and MOFCOM/State Council approval. It is preferable for the purposes of obtaining SINOSURE cover that the export contract/project should generate a supply of strategically interesting products or natural resources for China. However, we should note that the existence of a Chinese offtaker would not typically by itself satisfy the conditions for SINOSURE cover of debt into a project, irrespective of the value of that offtake contract the cover is really in place to assist export of goods/services from China. However, assuming the requisite level of goods/services were supplied into a project, such an offtake would no doubt assist the likelihood that SINOSURE will be interested in providing cover in relation to such a project. Further, SINOSURE may be more willing to provide cover in relation to a project if there is an element of Chinese equity investment involved, in view of the stated policy of the PRC to promote and ensure acquisitions of interests in foreign assets, particularly strategic resource assets. It is important to appreciate the global strategic interests of the PRC and the relative position of any contractor and any export contract/project in the hierarchy of those interests. 08 Norton Rose Group November 2010

9 China Export & Credit Insurance Corporation (SINOSURE) Although obtaining an initial response on underwriting from SINOSURE can be relatively quick within a week of SINOSURE receiving a complete file the full process can get very bogged down as the underwriting request is processed through MOFCOM, and even more so if it has to go to the State Council. The process can take between 3 and 6 months to complete. The length and relative opacity of the process form the basis of negative comments about dealing with SINOSURE. However, SINOSURE has made significant progress in both transparency and turn around times (barring the MOFCOM/State Council process). As a state policy institution SINOSURE is subject to directions given to it by MOFCOM. New directions apply to cover which SINOSURE has conditionally approved but which have not become the subject of binding policies, and can also apply retrospectively. Late last year SINOSURE began to require that all buyer credits be supported by a guarantee preferably a state guarantee and for private sector buyers a parent company guarantee. More recently (April 2009) MOFCOM has required that Chinese banks should hold a majority of any funding supported by SINOSURE. In current market conditions accessing either SINOSURE cover or C-EXIM funding is a possibility that few can ignore. SINOSURE has significantly expanded its capacity to underwrite transactions and has upgraded its country risk analysis and its country limits. Moreover it has experienced a huge surge in demand for its services and it struggles to keep pace. Norton Rose Group November

10 Accessing Chinese solutions for mining clients Accessing Chinese bank/eca facilities We have set out below a generic set of questions and answers, which address some of the key issues that sponsors may focus on in seeking to understand their ability to access Chinese bank/eca support for a mining project. Clearly this article provides only a summary overview of these points and further issues/detail may need to be investigated or discussed in relation to any specific transactions. Although we refer to The Export-Import Bank of China (C-EXIM) as an ECA, we should clarify that C-EXIM is not strictly an ECA but a state owned policy bank through which official support is provided on terms that closely follow the OECD guidelines on export credits; SINOSURE is the only official Chinese ECA. 1. What level of Chinese bank/eca facilities are offered? Is there any limit? Can a commercial loan amount be larger than the portion covered by an ECA guarantee? Chinese commercial banks are willing to provide both covered and uncovered facilities, although typically Chinese funding of commercial loans (particularly from a single lender) on a single project will be either ECA covered in full or fully uncovered, rather than partially covered and partially uncovered. There is no absolute fixed limit to the facility amount when accessing funds from Chinese institutions. However, there are certain limitations on the amount of cover which can be obtained from Chinese ECAs. In common with all other ECAs, Chinese ECA cover is limited to an amount equal to 85 per cent of the relevant export contract value, and the 15 per cent contribution/down-payment from the project company is typically required as a condition precedent to loan disbursement/ guarantee provision. This 85 per cent threshold is set by the OECD guidelines on export credits, although currently there are many temporary 10 Norton Rose Group November 2010

11 Accessing Chinese bank/eca facilities rules in place that have allowed ECAs to cover higher percentages and broader categories of eligible goods. Although the level of guarantee cover provided by ECAs usually varies between per cent (of both political and commercial risk), for single asset project finance SINOSURE can only provide up to 50 per cent commercial risk cover (although for corporate transactions it can also provide up to 95 per cent political risk cover). These percentages of cover are calculated against the amount of the contact value which SINOSURE is able to support ie, up to 85 per cent of the total contract value. However as more and more ECAs take measures to increase the percentage of cover that they can offer, we would expect SINOSURE to follow suit and become a much more influential source of cover in this respect this is certainly the mandate from the Chinese State as it seeks to develop its strategic macro-economic interests. For deals over a certain size (and the thresholds are both increased from time to time as the state widens SINOSURE s mandate, and are also to varying degrees relaxed depending on the strategic importance of the project to be financed), SINOSURE requires separate approval from the Ministry of Commerce (MOFCOM) and/or the State Council. These approvals can take a long time to be issued, however the SINOSURE underwriting department is capable of giving a qualified response (subject to such approvals) within a week of receiving a complete submission. 2. What might one expect as the debt/equity ratio? 80:20 is a typical debt:equity ratio. 3. In what currency will the loan be denominated? What is the base cost of funds? Loans from Chinese institutions may be denominated in any currency. Domestic lending is denominated in renminbi (RMB) but almost no cross- border lending has been done in RMB (although the possibility of cross-border RMB trade settlements and funding has recently become available). The vast majority of cross-border lending is in US$, based on a LIBOR base rate. Norton Rose Group November

12 Accessing Chinese solutions for mining clients C-EXIM direct funding to suppliers is typically tied to the currency of the relevant export contract (typically US$). 4. In what currency will the supplier/contractor be paid? As noted above, in cross-border transactions, the supplier/contractor will typically be paid in the currency of the relevant supply/epc contract (whether through commercial bank or C-EXIM funding). For domestic transactions, RMB may be used unless the relevant supplier/contractor is a foreign entity requiring payment in foreign currency. 5. Is the supplier/contractor paid directly by the Chinese bank? Typically Chinese bank funding will be made available direct to the supplier/contractor (following a drawdown request by the borrower), unless it is to be used to re-fund the borrower for payments already paid to the contractors/suppliers. Drawings require a supplier s/contractor s disbursement request to support a borrower s drawdown request. 6. Must all deals have a Chinese offtaker? If there is no Chinese offtaker what security is required? Do Chinese banks look for onshore security over mining rights/charges over payment accounts? In what instances might a parent company guarantee be required? It is not strictly necessary to have a Chinese offtaker, although the State banks prefer (and the ECAs require) some form of Chinese component to the deal, whether this be a Chinese offtaker, equipment supplier or EPC contractor. The security requirements of Chinese banks are much softer than typical Western bank financing, as Chinese banks often take the view that, particularly in relation to emerging economies, there is very limited value to onshore security, due to enforcement hurdles. Asset security is typically not required for any ECA covered portion of the debt. Typically a project company parent company guarantee will be required, although this can be negotiable. 12 Norton Rose Group November 2010

13 Accessing Chinese bank/eca facilities 7. Is it traditional for Chinese banks to look for hedging of commodities? Unlike typical international financings of mining projects, Chinese banks do not usually require any commodity hedging. 8. Is there a standard form of facility documentation? Is it LMA based? There is no official standard form documentation which Chinese banks work to, however each bank tends to have its own standard form which is an LMA based form. The documentation is becoming ever more Westernised /LMA based, particularly on international syndicated transactions as China becomes more involved in international crossborder transactions. Indeed, we are currently building a precedent for China Development Bank (CDB) using Asia Pacific Loan Market Association (APLMA) precedent wording. SINOSURE policies have become standardised they have general terms and a schedule that sets out the specifics of the transaction that is covered although some negotiation is possible. International syndicated loans may be governed by English or other foreign law, however large bilateral deals tend to be documented under Chinese law. SINOSURE requires arbitration as the dispute resolution forum. 9. Are loans structured on the basis of a payment cascade as per international project finance? No. Loans are structured on more simple corporate lending terms. 10. Will Chinese banks instruct their own technical adviser or is all technical due diligence done in-house? Are the usual pre-feasibility and feasibility reports required for Chinese finance into a mine? Typically the level of technical due diligence required by Chinese banks is more limited than that carried out by Western banks, and is done in-house rather than by appointing external advisers. Often the banks internal personnel will visit the relevant mine and agree the commercial deal as the technical due diligence is carried out on-site. Legal documentation may also be drafted and negotiated simultaneously Norton Rose Group November

14 Accessing Chinese solutions for mining clients with this site visit. Full pre-feasibility and feasibility reports are not typically required the Chinese banks adopt more of a high-level approach to the technical due diligence. 11. What Chinese approvals are required? Other than internal authorisations (eg, credit committee/board approval), the relevant approvals for enabling Chinese bank/eca funds to be injected into projects are (depending on the size of the facility) MOFCOM and State Council approvals. 14 Norton Rose Group November 2010

15 Resource M&A transactions involving Chinese investors Resource M&A transactions involving Chinese investors The surge in overseas investment by Chinese companies (both state owned enterprises (SOEs) and, increasingly, private companies) looks set to increase again. The total amount invested by Chinese companies offshore in 2008 reached US$52.15 billion, and the Chinese government s recent confirmation on 21 July 2009 of its intention to use China s huge foreign exchange reserves to support and accelerate overseas expansion and acquisitions by Chinese companies means that this year outward investment could exceed inward investment for the first time. In particular, SOEs in the oil and natural resources sector have accelerated their search for overseas investment opportunities to take advantage of depressed share and commodity prices around the world. This is in keeping with Chinese officials views that the deployment of foreign exchange reserves should focus on the natural resource sector in order to fuel China s domestic growth. Non-Chinese mining companies will be aware of the current opportunity to raise money through Chinese investors, and this article looks at some of the issues which they will be faced with when trying to secure PRC equity funding. An understanding of the issues involved, including the increased significance of due diligence for SOEs and the regulatory framework within which the parties must operate, will increase the likelihood of successfully completing a deal. Due diligence The prevalence of Chinese SOEs in the resources sector means that resource companies seeking to secure a Chinese investment should be prepared for a substantial due diligence process. Whereas the ready availability of cheap government finance, and the drive to secure resources, can mean that SOEs will be more willing to commit to the broad terms of the agreement at an early stage, they will almost certainly be obliged to present a comprehensive study of the investment to the Chinese governmental authorities when they seek approval for the investment and when they arrange their finance through Chinese banks. Norton Rose Group November

16 Accessing Chinese solutions for mining clients Resource transactions are often complex in nature and will involve a broad range of legal issues, including local mining regulations. Therefore, in order to assist a potential investor in understanding the key features of the target s business and the legal framework in which it operates, the target should anticipate the areas in which the potential investor is likely to be interested, and make initial preparations that will allow it to respond with the required information in a timely and rational manner. Many SOEs will appoint investment banks and legal advisers to assist them with: investment analysis and modelling issues tax issues structuring advice project implementation and completion and due diligence. Given the complexity of dealing with SOEs, these teams require significant diplomatic, legal, analytical and commercial skills to bring a transaction to a successful conclusion. Preparatory due diligence issues At the initial preparatory stage, the target should, in conjunction with its advisers: prepare a comprehensive virtual data room draft an introductory memorandum on the project and relevant documentation (including details regarding the history of the project/ target and background/reputation of the management teams) 16 Norton Rose Group November 2010

17 Resource M&A transactions involving Chinese investors be prepared for significant Q&A put in place a comprehensive confidentiality agreement and ensure all documents can be disclosed prepare a summary of local applicable mining laws and have mining data and analysis ready for scrutiny. Legislation mining law One of the primary areas of concern for a potential investor, and an area in which it is unlikely to have prior knowledge, is in relation to the local mining regulations of the jurisdiction in which the target conducts its mining operations. Building a team of advisers who can distil the applicable regulations and present them in a clear manner will be important for satisfying the requirements of the potential investor. The most efficient way to do this is perhaps for the principal legal advisers to engage local lawyers and other technical advisers, while retaining oversight of the entire due diligence process. This will ensure that the relevant local expertise is used and that it is harnessed and presented in a manner that will assist the potential investor in making its assessment of whether to invest in the target. Key issues for the local lawyers to address will include matters such as the precise ownership of the minerals, whether the State has a free carried interest in the target, whether there are any restrictions on the sale of the minerals and what approvals are required for granting mining rights. In addition to those matters, the potential purchaser will also be concerned with the specific mining regulations which provide the detail of the procedures regulating the local mining sector, such as the licences involved, financing issues, registration systems and environmental laws. Legislation relating to surface rights, foreign investment codes, state corporations, company law, localisation/empowerment laws, employment law, competition law and planning law will also need to be analysed. There is clearly potential for a vast amount of legislation to be drawn into the due diligence process for a resource M&A transaction. Norton Rose Group November

18 Accessing Chinese solutions for mining clients The experience of the target s advisers is therefore invaluable as it will allow the most important areas to be anticipated so that information and responses can be provided as soon as practicable. The target will want to ensure that it does all that it can to progress the transaction as speedily as possible as the complexity of China s legal environment (discussed below) often slows the pace of cross-border M&A transactions with Chinese companies. An additional factor which can delay completion of the investment is the probable requirement of the key Chinese authorities that all of the conditions precedent to the investment being made, other than regulatory approval, are satisfied before they will even begin to seriously consider the investor s application for approval. Further, there may well be special legislation or policies that govern investments by SOEs in the target s own jurisdiction (eg, the Foreign Investment Review Board in Australia), so it is important for the target to ascertain the nature of the prospective investor at an early stage. These issues may well take time to resolve and must be considered in both the scope and timelines for the conditions precedent. Mining projects are generally subject to a significant number of contractual and statutory requirements, including mining tenement conditions, farm-in agreements, joint venture agreements and royalty agreements. On a mining transaction the most significant documents in due diligence will be the mining leases/licences. The forms of mining leases/licences will differ between jurisdictions in some jurisdictions most of the provisions are set out in the law, while in others the contract contains the bulk of the terms. In any event, the potential investor will need to be informed of certain matters such as the nature of the rights granted (whether this is a concession, a licence or some other right), what it entitles the holder to do, what its terms are and under what circumstances they may be terminated. Other agreements made by the target, such as management agreements, offtake agreements, refining agreements, contractor agreements, insurance and employment 18 Norton Rose Group November 2010

19 Resource M&A transactions involving Chinese investors agreements will all be of significance to the potential investor. The ability of the target to have accurate information available immediately upon request and in an orderly fashion will again assist in the speed and success of the due diligence process. It is clear that there is potential for the due diligence process to become a time-consuming matter for the target. One method of sharing the responsibility in this regard is to offer that legal opinions from the local law advisers be provided to the potential investor. This will mean that the matters covered by the opinions do not need to be addressed in due diligence. There will obviously be a limit on the range of issues which can be dealt with in this manner, however corporate issues such as the target s valid incorporation, good standing and share capital history, as well as confirming the validity of the mining licences involved, may be dealt with by the legal opinions. This can be a useful tool in reducing the scope of the due diligence process and should be considered at the outset of the transaction. The due diligence process will evidently be a significant issue for both the potential investor and the target. The potential investor, who in the context of the Chinese mining sector will most likely be a SOE, will need to conduct a thorough due diligence process, and the target will want to ensure that it does all it can to provide a smooth and speedy process in which the potential investor is equipped with the information it needs to gain the necessary approvals and make an investment in the target company. However, there will be other factors beyond the due diligence process which relate to the nature of transacting with a Chinese counterparty in this sector that will be an issue to the target, and which the target will need to be prepared for in order to promote the success of the transaction. Norton Rose Group November

20 Accessing Chinese solutions for mining clients Approval procedures for Chinese companies investing overseas Virtually all overseas investments by Chinese enterprises will require government approval in China before they are able to be completed. The level and extent of those approvals is largely governed by the level of the investor if, as is often the case with significant investments in the resources sector, the investor is a SOE, and by the value of the investment. Further approvals may be required according to the particular circumstances of the investment. For example, an investment in a uranium mining company may need additional approvals from the Ministry of Science and Technology. Often the key factor is not whether a particular investment will be approved, but rather how long that approval might take, and what conditions may be imposed upon the approval. The target company needs to be pro-active in understanding the impact of the Chinese approval regime on a prospective investment. There is nothing to be gained by relying on the investor or its advisers to include these approvals in the conditions precedent. Regardless of the contractual legal rights of the parties, the Chinese investor cannot, nor will it, proceed without all the necessary approvals. China s best known international enterprises, such as Sinopec, Sinosteel, Baosteel, Minmetals and CNOOC, are all under the supervision of the State Assets Supervision and Administration Commission (SASAC). SASAC was established to hold the Government s interest in those enterprises and operates, in effect, in the manner of the majority shareholder in listed companies elsewhere. It does not generally interfere in the daily operations of the enterprise, nor make commercial decisions for them, but it does have the power to hire and fire the enterprises senior executives, and it does monitor major investments. As a matter of prudence, we would usually include SASAC approval as a specific condition precedent in any significant investment by a major Chinese enterprise. Interestingly, the Chairman of SASAC, Li Rong Rong, recently described legal risk as the single most important challenge for Chinese enterprises investing overseas. We have been invited by Deputy Chairman Li Wei to present a series of training seminars to SASAC s managers and enterprises on managing legal risk in difficult jurisdictions. 20 Norton Rose Group November 2010

21 Resource M&A transactions involving Chinese investors The approval of the National Development and Reform Commission (NDRC) is usually the determining factor in satisfying Chinese government requirements. If NDRC gives its approval, then the other Chinese authorities are likely to follow. Enterprises will usually lodge preliminary applications with NDRC, and will often engage in lengthy discussions with the enterprise, but as a rule NDRC will not make a final decision until all government and other approvals in the target s jurisdiction have been granted. The target should factor in a delay of at least three months for NDRC approval. Ministry of Commerce (MOFCOM) approval is also usually required. Recent amendments to MOFCOM regulations have eased the burden of approvals somewhat, but it remains a necessary step in the case of most investments. Detailed information is available on this process in the article accessed via the address below. MOFCOM is becoming increasingly interested in reviewing both inbound investment into China and outbound investment from China, particularly in the context of the recent changes to the anti-monopoly regime in China. Further detail can be accessed via the address below. Finally, approval from the State Administration of Foreign Exchange (SAFE) will be required for the transmission of foreign currency funds out of China by the investor. This is usually the last step in the approval chain. There are no clear criteria for obtaining SAFE approval, although our experience is that if a full set of approvals has been obtained from NDRC, MOFCOM and SASAC then it is a straightforward process to obtain SAFE approval. Further detail can be seen in the article accessed via the address below. Norton Rose Group November

22 Accessing Chinese solutions for mining clients State owned enterprises There is much ongoing debate as to the true nature of China s SOEs. The enterprises themselves will often vigorously defend their autonomy from government. They will describe themselves as government owned, yet commercial, enterprises and there is no doubt that in our recent experience they are driven by normal commercial performance criteria. There is genuine, and occasionally fierce, competition between SOEs in China, and it is common for us to be expressly reminded that our obligation of professional confidentiality extends to non-disclosure to other SOEs, despite their common parentage. Sinosteel s successful hostile takeover of Midwest Corporation in Australia last year, a world first, was overwhelmingly driven by market conditions, and clearly demonstrated that SOEs are capable of marketresponsive decision making in the most challenging of circumstances. Despite this, SOEs do still face unique challenges when they try to invest in some foreign countries. Both CNOOC s bid for Unocal in the US and Chalco s bid for part of Rio Tinto in Australia/UK demonstrate that target companies need to be alive to the potential political issues that might impact on these investments, and be prepared to engage in the political process. Occasionally, but not often, SOEs in both target and bidder countries will seek agreement from the target, as a condition of investing, that it will source goods or services from other Chinese enterprises. However, such requirements are more likely to arise in the context of project finance negotiations with Chinese state financial institutions, or where the investor is a disclosed consortium of Chinese enterprises whose charters make readily apparent their intended respective roles. If there are collateral conditions to the investment, they are more likely to relate to product offtake contracts. If a Chinese state owned steel mill is investing in an Australian iron ore project, it will be no surprise to the target if the investor requires guaranteed supply contracts. Indeed, the investor s capacity to deliver a market for the target s product is likely to 22 Norton Rose Group November 2010

23 Resource M&A transactions involving Chinese investors be a significant motivating factor in the target s consideration of the investment. Care will need to be taken that any approval required from any related party is obtained in those circumstances. Despite the above observations, China s SOEs are not typical international investors. Apart from the approval regime to which they are subject, SOEs are managed by a strictly hierarchical management structure which can be frustrating for target companies. Lines of authority are not always clear. The investor s decision-making criteria may not always be clear nor necessarily motivated by profit alone. It may be subject to longer term goals than those which are apparent to the target. It is critical therefore that target companies familiarise themselves as much as possible with the prospective investor s other business interests. The formal signing of investment documents, whilst likely to be accompanied by much ceremony, is rarely seen by the Chinese investor as an end in itself. Rather, it is a milestone on an ongoing journey between the parties; a statement of the parties intention at the time. Experienced target companies will both expect, and prepare themselves for, renegotiations in the future. Further cultural nuances when doing business in China are discussed below. Norton Rose Group November

24 Accessing Chinese solutions for mining clients Enforcement issues when dealing with Chinese counterparties As in any transaction, the transaction documentation will need to contain appropriate governing law and dispute resolution provisions to ensure that obligations are enforceable in the event that a party refuses or fails to perform its side of the bargain. A contract with no means by which to enforce the obligations contained in it is little more than a dead letter. In the vast majority of international transactions, this need for enforceability will (for reasons explained below) result in international arbitration, rather than litigation before national courts, being adopted as the final form of dispute resolution. Arbitration can be adopted either as the sole means of dispute resolution or as the final part of a stepped procedure by which (for instance) there is first to be (as a pre-condition to arbitration) an attempt at amicable settlement or a fast track form of dispute resolution (such as mediation). This article looks briefly at points to bear in mind when choosing between dispute resolution options when contracting with a Chinese counterparty, and looks primarily at how (following the receipt of a favourable award in arbitration) enforcement proceedings may be taken against a Chinese counterparty. An understanding of the risks involved in enforcing international arbitration awards in China is an inherent part of understanding the risk profile of any mining deal involving a Chinese entity, be they a contractor, an offtaker or an investor. Choice of jurisdiction/dispute resolution procedures The starting point when considering these matters is the almost universal truth that a non-chinese contracting party will not be willing to contemplate having to bring a claim in the Chinese courts. This might be for fear of bias among the courts in favour of Chinese entities (although this is not necessarily a fear validly held). More importantly, however, it will be borne from a desire to see a neutral form of dispute resolution adopted which does not inherently favour, in terms of culture, language or procedure, either contracting party. 24 Norton Rose Group November 2010

25 Enforcement issues when dealing with Chinese counterparties In rare cases where a non-chinese entity wishes to agree that Chinese litigation is the applicable forum, then of course any dispute will be resolved and decision enforced in accordance with the applicable rules of Chinese law. However, it is international arbitration, being a consensual process capable of being tailored to the parties desires, that fits the bill in virtually all other situations. Arbitration Although one can debate at great length the pros and cons of different methods of dispute resolution, when it comes to a process which is intended to give rise to a final and binding decision, the simple fact is that arbitration is the only truly viable option on an international basis. This is thanks to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). The New York Convention now has some 144 signatory States. In summary, the New York Convention sets up a framework by which signatory States will recognise and enforce awards emanating from other countries (although many countries sign up subject to what is known as the reciprocity reservation, meaning that they will only enforce awards emanating from another signatory State). China has signed the New York Convention subject to the reciprocity reservation, meaning that it is bound under the terms of the New York Convention to recognise and enforce awards made in any of the 143 other signatory States. The nationality of an award for New York Convention purposes is typically determined by the seat (or legal place) of arbitration. This does not necessarily mean the location in which hearings are held. Indeed, the International Chamber of Commerce (ICC) Rules, for instance, make it expressly clear that tribunals are free to conduct hearings outside of the country of the seat. It follows that in drafting arbitration provisions in a contract with a Chinese counterparty, it is important to specify a seat of arbitration which is a New York Convention signatory State. This is not problematic in practice since all of the world s major arbitration centres are (unsurprisingly) in signatory States. Norton Rose Group November

26 Accessing Chinese solutions for mining clients The New York Convention is undoubtedly a major achievement in international relations and trade. To regard it as a guarantee that an award will always be enforced is, however, wrong. It sets up a framework pursuant to which countries are obliged, as a matter of international public law, to recognise and enforce awards. The New York Convention does not prescribe the process by which awards are to be enforced all matters of procedure are left to be dealt with locally in the country of enforcement, but typically arbitral awards will need to be enforced by application to the relevant local courts. Questions such as what assets may be seized, how and within what time frame are accordingly local questions. Equally, it is up to local law to lay down the mechanism by which the successful party in arbitration is to apply to the local court to make an enforcement order. Needless to say, in some countries the process is significantly more complex, time consuming and costly than in others, and we set out below some of the key considerations in relation to enforcement in China. A complete discussion of the issues which arise under the New York Convention would be voluminous. The key summary points to remember in relation to the New York Convention are as follows: 1. Not all countries of significance in the mining industry have signed it (see attached maps and address below to schedule of signatories). NYConvention_status.html 2. It sets up a framework for international enforcement but does not guarantee it. In particular: The New York Convention permits States not to enforce awards in certain circumstances (see 3 below). Some countries are more supportive of international arbitration (and so less interventionist at the enforcement stage) than others. 26 Norton Rose Group November 2010

27 Enforcement issues when dealing with Chinese counterparties The New York Convention is interpreted locally and therefore differently from place to place. All matters of procedure are left to local law (including the range of enforcement orders available and the timing of any court applications). 3. Article V of the New York Convention permits a State to refuse enforcement where (in summary): A party to the arbitration agreement was under an incapacity according to the law applicable to it. The agreement to arbitrate is invalid according to the law to which the parties subjected it/the law of the place where the award is made (ie, the seat of arbitration). The party against whom the award is invoked was not given proper notice of the proceedings or of the appointment of the tribunal, or was otherwise unable to present its case. The award contains decisions beyond the tribunal s jurisdiction. The tribunal was not constituted in accordance with the agreement of the parties/the law of the seat of arbitration. The award is not yet final and binding or has been set aside by the court of the seat. The subject matter of the arbitration is not arbitrable according to the law of the country of enforcement. Recognising and enforcing the award would be contrary to public policy in the country of enforcement. Norton Rose Group November

28 Accessing Chinese solutions for mining clients As is apparent from the bold sections above, certain significant matters fall to be determined according to the substantive law of the country in which enforcement takes place, even if that was not the law governing the contract or the dispute. Looking briefly at the position in China on these matters: the penultimate exception (listed above) presents no practical difficulty nowadays as China s Arbitration Law has enlarged the scope of arbitral subject matter to include contractual and property disputes; it also permits arbitration between legal and natural persons and organisations. However, the final exception does cause concern because its application is unclear. Rendered in China as social and public interest but lacking official definition, this exception appears to be broader than public policy. A commonly held view is that the courts will rarely allow this exception to be invoked. Finally, it is important to note that, at least in the case of enforcing an award for damages, enforcement proceedings should be taken in any country(ies) where the unsuccessful party has assets against which the award may be enforced. Ideally, such assets would take the form of bank accounts or other liquid assets. If, therefore, a Chinese counterparty has assets outside China, the enforcing party is free to (and may well choose to) take enforcement proceedings elsewhere than in China. Enforcing arbitral awards in China Assuming enforcement proceedings take place in China, there are some practical and legal points which need to be borne in mind. At least in certain circles, China has traditionally been regarded as a difficult country in which to achieve New York Convention enforcement. As China s role in world trade grows, it becomes increasingly important to China that this perception does not persist. In 1995 the Supreme People s Court (SPC) issued a notice which has gone some way towards addressing this perception. It requires courts to deal with applications for enforcement within two months from receipt and to refer draft decisions refusing enforcement first to the Higher People s Court (HCR) and then to the SPC for review. The referral should be made within the same two month period. However, there is no set time for SPC rulings, 28 Norton Rose Group November 2010

29 Enforcement issues when dealing with Chinese counterparties which may not be issued for months or even years after the application is made. Although there is no right of appeal on review, and no right to appear before the HCR or SPC, the SPC may be amenable to informal discussion. The review system applies only to awards made by a foreignrelated arbitration commission in China or a foreign arbitration institution: it does not apply to ad hoc awards, made in China or elsewhere, nor to domestic awards. The time limit for an application for enforcement is two years reckoned from (and including) the final date for performance stated in the arbitral award. It usually takes about two months to put together an enforcement application. Preparations should be put in hand while settlement negotiations are in progress, rather than waiting for them to end. Original documents are required to be filed with the Court but a certified copy may be accepted if it is impossible or impractical to file the original documents. Care should be taken to check translations for accuracy before they are lodged as there is no opportunity to correct errors later. The documents required include: duly authenticated original award original agreement to arbitrate Chinese translation of the award and the agreement to arbitrate, authenticated by a Chinese embassy or consulate or notarised by a Chinese notary public written application for recognition and enforcement of the award (in Chinese), setting out the grounds and matters on which the application is based, the subject matter of enforcement and details of assets owned by the respondent power of attorney in favour of the applicant s lawyer (in Chinese) and Norton Rose Group November

30 Accessing Chinese solutions for mining clients proof of identity of the applicant (eg, certificate of incorporation, certificate of good standing or business licence) and certificate of identity of legal representative. As discussed, for most foreign parties the preferred method of dispute resolution is international arbitration (ie, arbitration with its place or seat outside China). Under Chinese law this choice is restricted to foreign-related disputes. There are a number of factors to consider in determining whether a dispute is foreign-related. First, at least one of the parties should be foreign. No company incorporated in China, including a Chinese wholly owned subsidiary of a foreign company, will be regarded as foreign. Equally no company incorporated outside China, including companies registered in Hong Kong, Macau and Taiwan, will be considered Chinese. Second, a Chinese court will have regard to the subject matter of the transaction to determine whether it is foreign or domestic. Incidental cross-border elements are likely to be disregarded. The third case is where the legal facts that generate, alter or terminate rights and obligations between the parties occur outside China. Alternative forms of international arbitration fall into the two broad categories: institutional and ad hoc. The more common institutional options are listed below: ICC arbitration seated in Paris, Hong Kong or Singapore LCIA (London Court of International Arbitration) arbitration seated in London, Hong Kong or Singapore other venues for ICC and LCIA arbitration include Geneva and Zurich. The Stockholm Chamber of Commerce is also well known HKIAC (Hong Kong International Arbitration Centre) arbitration in Hong Kong and SIAC (Singapore International Arbitration Centre) arbitration in Singapore. 30 Norton Rose Group November 2010

31 Enforcement issues when dealing with Chinese counterparties To a greater or lesser extent each of these institutions administers arbitrations, has its own rules governing the appointment of arbitrators and the procedure in arbitration, and its own scale of fees, the HKIAC having the lowest fees of all. Hong Kong and Singapore are the best arbitration venues in Asia. Each has sophisticated national arbitration laws and enjoys strong support from the local judiciary. The HKIAC and the SIAC tend to be preferred by parties to foreign-related agreements. In negotiations a Chinese party may begin by pressing for CIETAC (China International Economic and Trade Arbitration Commission) arbitration but eventually accept either HKIAC or SIAC as a satisfactory compromise. There are differences between HKIAC and SIAC in their approach to case administration and fee structures, and these differences should be considered before a choice is made. A further alternative, and one that is often adopted, is ad hoc arbitration in Hong Kong or Singapore, sometimes subject to the UNCITRAL rules and with either the HKIAC or SIAC nominated as the appointing authority. Ad hoc arbitration in China is problematical. It is generally thought that Chinese arbitration law requires all arbitrations in China to be conducted by a recognized Chinese arbitration commission. There are a large number of these commissions; CIETAC is probably the best known and most widely used. Foreign arbitration institutions such as the HKIAC, SIAC and ICC are not recognized arbitration commissions in China. There is a distinct possibility that the nomination of any foreign institution with a seat of arbitration in China would be treated as invalid by a Chinese court. However there should be no objection to ad hoc arbitration conducted outside China so far as enforcement inside China is concerned. In 2007 the SPC clarified its view of Hong Kong ad hoc arbitration by stating that these awards would be enforced in China in the same way as Hong Kong institutional awards. This statement may be taken as indicative of the way other foreign ad hoc awards are likely to be treated. Even so, there remains a drawback with foreign ad hoc Norton Rose Group November

32 Accessing Chinese solutions for mining clients awards in China in that the reporting and review system mentioned above applies only to the awards of foreign-related arbitration commissions in China or a foreign arbitration institution. In short, the safer route is to adopt institutional arbitration. Arbitration inside China may be preferable to litigation inside China but is still compared unfavourably to arbitration outside China. There are several reasons for this. Taking CIETAC as an example, the appointment procedure is perceived to result in a preponderance of Chinese appointments; the selection of arbitrators is restricted to a panel unless otherwise agreed between the parties and approved by CIETAC; rates of remuneration are low causing preferred arbitrators to decline appointment; the ad valorem fee scale yields very substantial charges in high value disputes; and the application of fairness and equity in the arbitral process can lead to unpredictable results in the award. To an extent some of these points can be addressed by modifying the standard clauses used by arbitration commissions like CIETAC, eg, by requiring the third arbitrator to be of a different nationality from either of the arbitrators appointed by the parties and by specifying English as the language of the arbitration (otherwise it will be Chinese). But there is nothing that can be done about the lack of power in tribunals to grant injunctions and evidence preservation orders. Parties are obliged to resort to the local courts for such relief and also for resolution of disputes over the jurisdiction of arbitration tribunals. As a general rule foreign parties who are willing to agree arbitration inside China should insist on the nomination of CIETAC, or alternatively the Beijing Arbitration Commission, and make suitable modifications to the standard arbitration clauses. Cross-border litigation does not benefit from any equivalent to the New York Convention. China has only a few bilateral agreements concerning the mutual recognition and enforcement of court judgments. One of the most recent arrangements has been between China and Hong Kong. This came into effect in August Its application is restricted by a number of conditions: for example, the parties should have agreed exclusive 32 Norton Rose Group November 2010

33 Enforcement issues when dealing with Chinese counterparties jurisdiction in the Chinese or Hong Kong courts and there are certain matters which are reserved to the jurisdiction of the Chinese courts. By comparison, the arrangement between China and Hong Kong for the recognition and enforcement of arbitral awards (February 2000), which reflects the New York Convention, is far less restrictive. Coming back to the various methods of dispute resolution available, we have not entered into a detailed discussion of the pros and cons of mediation, expert determination, amicable settlement discussions, early neutral evaluation or any of the other numerous procedures which may be adopted by agreement in any given case, since this is not the focus of this article. It is important to understand, however, that such forms of alternative dispute resolution frequently do not give rise to anything which purports to be a final and binding decision, and even where they do the New York Convention does not assist when it comes to enforcing the result, since it applies strictly to arbitral awards only. In China there is a discernable preference for mediation. There are several forms of mediation in use: institutional mediation, mediation under the auspices of an arbitration commission and court assisted conciliation. We can provide further detail on any further issues relating to such forms of dispute resolution if required. Norton Rose Group November

34 Accessing Chinese solutions for mining clients Reciprocal enforcement of arbitral awards under the New York Convention Ratified Not ratified This map is not definitive and primary sources should be checked before acting upon it. 34 Norton Rose Group November 2010

35 Observations on dealing with Chinese entities Observations on dealing with Chinese entities We have set out below some key observations that should be considered when dealing with Chinese entities. These observations are focused primarily on dealings with Chinese State Owned Enterprises (SOEs), given that SOEs are the major investors in the energy and resources sector, however these observations can in the main be applied to dealings with all other Chinese entities. The observations are separated in two categories. First, transaction observations, which look at the different approach that Chinese people may have to the transaction process and key transaction issues. Second, cultural/relationship observations, which can have a key impact on the success or otherwise of a deal. Transaction observations Confidentiality Agreements (CA) 1. Often the first document you will sign; sometimes your first real interaction with a Chinese investor. 2. Western companies tend to treat with degree of informality and process; not often considered a major step in a relationship. 3. Chinese investor may be reluctant to sign a CA at outset. 4. Any agreement (including a CA) will have to go through multiple channels and processes internally for approval. 5. Your contact point is unlikely to have authority to sign the CA; decision making is often from the very top. 6. Unlikely to recommend internally to sign the CA until the project has been qualified as a potentially good project. 7. Expect to be asked for detailed (usually technical) information before a CA is signed. Norton Rose Group November

36 Accessing Chinese solutions for mining clients 8. Need to balance the risk of providing confidential information. 9. Good practice to provide the information noting that it is confidential (equitable duty of confidence) if no CA in place. MOUs, HOAs & Co-operation Agreements etc (MOU) 1. MOU often requested/signed. 2. Same approvals issues for CAs apply. 3. Signifies an intention/interest in developing a relationship; often the first step in forming a business relationship. 4. The starting point for discussions. Not usually intended to signify a commitment to do a deal, but a commitment to talk (in good faith) about doing a deal. 5. Doubts as to whether MOUs are legally binding (due to commercial uncertainty), however they are morally binding. 6. Not necessarily as significant legally for Chinese investors as for Western companies; but demonstrates strong moral and business commitment. 7. MOU usually will contain a lot less detail than a western company (or lawyer) would consider the norm. 8. Public listed companies should take care when signing and announcing an MOU. 9. Lack of detail can help you but also harm you; need to strike a balance. 10. often 1-3 pages for major deals and a lot is left unsaid; affords greater flexibility later. 36 Norton Rose Group November 2010

37 Observations on dealing with Chinese entities 11. When it suits, you may be held to what is stated in the MOU, even if not legally binding; relationship impacted if you walk away from an intention stated in the MOU. 12. scrutinise a non binding MOU with the same level of detail as you would a binding MOU. 13. consider impact of signing the MOU on competitive tension for your project. 14. May be seen to be aligned with a particular investor. Resource & technical information 1. Critical area of focus early in the relationship. 2. Manage resource and technical information provision carefully. 3. All resources have positives and negatives; it is all about project economics and having solutions for any negatives. 4. Resist the temptation to present only positive matters at the beginning and drip feed the negatives or present them only at a later stage; can significantly impact on the relationship (trust). All issues should be presented, and queries answered, frankly and objectively. 5. Provide solutions to issues rather than simply presenting negative comments. 6. Shift of interest towards late exploration assets. SOEs are now less interested in greenfield/early stage projects/assets, and more interested in more advanced projects/assets which are producing/ close to production. Norton Rose Group November

38 Accessing Chinese solutions for mining clients Know who you are dealing with (including internal structures) 1. Don t necessarily get into bed with the first suitor that asks for your hand; other competition for your asset can quickly disappear if you are linked with one suitor in particular. 2. Make sure your interests are aligned with the potential suitor. 3. This is easier in the uranium sector for Chinese investment given the limited number of SOEs authorised to import uranium. 4. Spend significant time considering your project and your suitor conduct a detailed SWOT (strengths, weaknesses, opportunities, threats) analysis. 5. Your counterparty will be well prepared for negotiations and will have done extensive (technical) evaluations on your resource. 6. internal politics in the investor organisation can affect you. 7. Make a real effort to understand the internal management structures within the investor organisation. This is difficult to do, however it will help you understand who the key decision makers are and the authority of the relevant persons that you are dealing with. 8. It is critical to the success of a deal to talk to the right person within a company. A mainland Chinese born person in your team can help enormously in this regard. Due diligence 1. Extent of due diligence varies dramatically from organisation to organisation. 2. Those with more international deal exposure are very sophisticated at due diligence, particularly technical and resource quality. 38 Norton Rose Group November 2010

39 Observations on dealing with Chinese entities 3. SOEs who are new to international investments are less focused on due diligence. 4. Extent of due diligence is a balancing act (risk vs cost). 5. We see this as an increasingly important area. 6. Some key areas of focus that raise particular concerns: Nature of mining tenements (including co-existing exploration and mining rights) Native Title and Aboriginal Heritage (applicable in Australia) Asset versus share acquisition differences? Private royalty arrangements Security over tenements Pastoral leases Nature and extent of approvals for project development Environmental liabilities Infrastructure access Nature of unincorporated joint ventures (particularly legal ownership of JV assets and assets held by JV manager) Chinese English translations 1. Dual Chinese English documents becoming more common. 2. Which language takes priority if the Chinese and English words conflict? Norton Rose Group November

40 Accessing Chinese solutions for mining clients 3. Some Western legal concepts are hard to translate into Chinese legal concepts: Unincorporated joint venture Tenements Tag/drag rights 3. Non legally qualified translator may not be able to accurately translate the document. 4. Actively address this issue in the negotiations. Negotiations 1. Greater degree of formality than Westerners are used to. 2. Usually one lead negotiator, with a supporting contingent. 3. Demonstrating respect for lead negotiator (and entire team) is critical. 4. Don t do things that cause the other negotiation team to lose face: Aggressive or rude behaviour Beware of going around the negotiation team (high risk strategy if you are not adept at managing the issues that arise) 5. Loss of face sounds trite; but is critical. 6. Expect negotiations to take twice as long as you think they should (time can be a weapon). 7. Chinese negotiation team will be unlikely to make material commitments that vary from previously agreed points without detailed (internal) consideration. 40 Norton Rose Group November 2010

41 Observations on dealing with Chinese entities 8. Negotiations are not linear when you have discussed (and seemingly resolved ) an issue it may well be raised again later the deal is a basket of rights and obligations. 9. Listen for the qualified yes ; don t over-estimate meaning of yes until the deal is done. Cultural and relationship observations Face and the loss of it 1. Don t underestimate how important this is; and how hard it is for us to understand. 2. Face is an essential component of the Chinese national psyche. 3. Having face means having a high status in the eyes of one s peers, and is a mark of personal dignity. 4. The Chinese are acutely sensitive to gaining and maintaining face in all aspects of social and business life. 5. Face is a prized commodity which can be given, lost, taken away or earned. 6. Causing someone to lose face can ruin business prospects. 7. The easiest way to cause someone to lose face is to insult an individual or criticise them in front of others. Another example could be circumventing the person that you are dealing with and approaching someone with a higher position within the company. 8. Giving face earns respect and loyalty, but praise should be used sparingly and with caution; over-use suggests insincerity on the part of the giver. Norton Rose Group November

42 Accessing Chinese solutions for mining clients Mobilise Chinese assets early 1. Difficult for a foreigner to communicate and be trusted like a native Chinese person: Language is difficult (business Mandarin essential) Chinese way of doing business is complex Strong sense of national pride 2. For mainland Chinese investors have an effective mainland Chinese ally on your team. They can: Speak same dialect Analyse body language Work out who has the real power in the negotiation team (not always the lead negotiator) Smooth over any inadvertent face issues 3. Conversely the presence of a Westerner should be encouraged. Chinese investors will often see a visit by a senior foreigner as an indication of sincerity and commitment by the Western company. 4. Work out who in the other negotiating team holds real power not always the boss and help smooth out any inadvertent wrinkles. Beware linear logic 1. Western thought tends to be dominated by linear logic. 2. Chinese thinking is influenced by early philosophers, who saw a paradoxical balance of opposites in all things. 42 Norton Rose Group November 2010

43 Observations on dealing with Chinese entities 3. Westerners may tend to look for clear alternatives (option A instead of option B), Easterners may examine ways to combine both option A and option B. 4. Don t be too quick to judge a different way of thinking as being illogical, evasive or devious. The other side may consider they are being perfectly straightforward. Respect the hierarchy of society Mao Zedong s thoughts on discipline (published 1966) is a good insight into structures which persist in Chinese organisations even to this day: The individual is subordinate to the organisation. The minority is subordinate to the majority. The lower level is subordinate to the higher level. This underlies why Chinese society and companies tend to be very hierarchically organised, and why Chinese people seem to be more group orientated than individualistic. Show a genuine interest in China and building a relationship 1. Demonstrate a genuine interest in Chinese culture and a desire to understand the Chinese way. 2. Obtain some basic knowledge of China, its history and culture before you commence negotiations/meetings. 3. Show a willingness to try Chinese food, drinks, cultural events. 4. Relationships are generally built outside the negotiation room; accept invitations to dinners, and reciprocate. Norton Rose Group November

44 Accessing Chinese solutions for mining clients Some basics on Chinese etiquette and other tips 1. Greetings: Light handshakes may be regarded as being disrespectful Chinese name starts with surname; address by surname Mr Li and continue to do so Exchange business cards with clients using both your hands and light bow. DO NOT throw business cards across the table Let senior people enter and leave the room first Don t be offended by being asked private questions, for example, marriage status, age, family members, etc. 2. During negotiations: Patience is golden Don t push aggressively for decisions; generally the Chinese negotiation team may not have authority to make a decision Avoid sensitive political discussions, such as human rights, Tibet, internet and media freedom Inviting Chinese clients out for dinner during the course of lengthy negotiation demonstrates good faith; choose an appropriate restaurant. If you can t achieve what you want at the negotiation table, you might be able to achieve it at the dinner table Drinking is a must for business dinner particularly until a high level of trust and friendship is established 44 Norton Rose Group November 2010

45 Observations on dealing with Chinese entities Show that you are a friend, not an opponent Be prepared to make small concessions to demonstrate your good faith in the developing relationship 3. Closing the deal/signing: Be happy; but not too happy Signing is the commencement of an official long term relationship, it is a START of the deal Put as much effort into the relationship post-signing as you did pre-signing Don t give clocks as gifts; signifies death Issues such as these, coupled with the comparatively young framework of laws in China and the bureaucratic procedures which can often be encountered, mean that the acquisitions, financings and other transactions involving Chinese entities can benefit greatly from utilising the knowledge and experience of local advisers who can help them steer a course around these potential obstacles. Norton Rose Group November

46 Accessing Chinese solutions for mining clients Norton Rose Group: track record Chinese financial institutions Advising China Development Bank on its move to a strategic partnership with Barclays plc as a result of which CDB became a major investor and subscribed for 1,450 million of Barclays new ordinary shares (or 3.1 per cent of Barclays then issued share capital). The transaction builds on the strength of our China practice and involved not only a sizeable team in London but also our offices in Beijing, Hong Kong and Amsterdam. We recently also advised China Development Bank in connection with its participation in Barclays subsequent share issue to raise approximately 4.5 billion. advising the Export-Import Bank of China (CEXIM) as sole lender on the approximately US$300 million financing of two 147,210m3 LNG tankers on long-term time charter for the transportation of LNG from the Tangguh project in Indonesia to the Fujian LNG Terminal located in Fujian Province, PRC. advising Industrial and Commercial Bank of China on provision of various SINOSURE covered credit facilities to support the export of technology and software equipment supplied by Chinese telecommunication companies to telecommunication operators in Africa. advising Industrial and Commercial Bank of China regarding a $250 million SINOSURE covered credit facility to the Uzbek Joint-Stock Commercial Industrial-Construction Bank, Uzpromstroybank, Tashkent, Uzbekistan. advising HSBC, BNP Paribas and CEXIM in relation to SINOSURE and COFACE supported facilities made to a Pakistan power company for the construction of a power plant at Nandipur. 46 Norton Rose Group November 2010

47 Norton Rose Group: track record Advising Société Générale, HSBC, Landesbank Baden-Württemberg, Standard Chartered Bank and Natixis on a US$114.5 million Korea Export Insurance Corporation (KEIC) backed loan facility to Kumho Tire (Tianjin) Co., Inc. of the PRC. Due to the country of incorporation of the borrower and the ECA support involved this deal had to be tailored to meet legal and regulatory requirements arising under both PRC law and Korean law. advising Société Générale in its purchase of promissory notes issued by an Iranian shipping company to a Chinese shipyard. The Iranian obligations under the notes were supported by a SINOSURE policy. This was one of the very first policies ever issued by SINOSURE and we actively participated in the negotiation of its terms. advising the Indonesian power company (PLN) on a number of financings provided by Chinese banks with SINOSURE cover, including financings for the power stations Indramayu, Paiton and Suralaya. advising China Development Bank on a number of ongoing loan transactions to sovereign borrowers in Latin American, CIS and other jurisdictions. Advising Development Bank of Kazakhstan (a wholly owned subsidiary of Samruk-Kazyna (SK)) in relation to a $5B master facility provided to it by C-EXIM. The master facility is to be used to support projects in the energy/mining sectors in Kazakhstan by providing funds to allow DBK to on-lend to sponsors/projects that involve Chinese equipment suppliers and contractors. The facility forms part of the larger picture of Sino-Kazakh commercial and strategic relations. Norton Rose Group November

48 Accessing Chinese solutions for mining clients Chinese financial institutions Advising China Development Bank on the funding of the acquisition by Hunan Valin of an interest in Fortescue Metals Group Ltd of a value of approximately US$335 million. The matter was complex in that it involved cross-border issues between China, Australia and other international jurisdictions. The team comprised of lawyers in our Banking & Finance practice together with our market leading China practice who were able to address quickly and practically the crossborder issues relating to the financing and security documentation. The deal was closed in late April advising Bank of China Limited, Sydney Branch, in respect of facilities totalling approximately A$ equivalent 750million which are being provided to various subsidiaries of China Minmetals in connection with the acquisition of assets by China Minmetals from Oz Minerals. China Minmetals acquisition of Oz Minerals totalled A$1.7 billion and is one of China s most significant resources acquisitions in Australia. advising Bank of China and the Bank of Tokyo-Mitsubishi UFG Ltd as Joint Lead Arrangers on a syndicated negative pledge loan transaction to Telstra for $450 million equivalent. The syndication was comfortably over-subscribed in challenging market conditions, with participation from our clients along with a range of other Asian regional banks. The facility comprises a $290 million equivalent two-year US$/A$ tranche and a $160 million five-year tranche. The US$ tranche will be swapped at drawdown into Australian dollars through to maturity. The transaction is a significant one and Telstra made a particular mention of our clients great professionalism in introducing new investors to Telstra while delivering a competitively priced transaction given the current economic climate. 48 Norton Rose Group November 2010

49 Norton Rose Group: track record Corporate finance Mining Advising the leading European steel maker, Arcelor, in all aspects of its negotiation and completion of its $800 million joint venture with Baosteel of China and Nippon Steel of Japan. advising Oriel Resources Plc in relation to the takeover offer for its entire issued share capital by Mechel. The offer valued the entire issued and to be issued share capital of Oriel at approximately US$1.5 billion. advising Peter Hambro Mining in respect of a strategic investment in Rusoro Mining Ltd. A syndicate led by Peter Hambro Mining invested US$80 million in Rusoro through an exchangeable loan. advising Zamin Resources on the sale of its 50 per cent interest in Bahia Mineracao Limitada, the holding company of the Pedra de Ferro Iron Ore Project in Bahia, Brazil to ENRC, for US$300 million and on Zamin s new joint venture with ENRC. advising China Non-Ferrous Metals International Mining Co., Ltd. (cnmim) on the acquisition of an AIM listed company holding a gold mine in Kyrgyzstan. advising Goldman Sachs Strategic Investments (Asia) L.L.C., the equity investments arm of Goldman Sachs, and CDH Shine Limited, the investment vehicle of CDH China Growth Capital Fund II, L.P., on their acquisitions of equity interests in Henan Shuanghui Investment and Development Co., Ltd., Henan Luohe Shuanghui Industrial Group Company Limited, and a number of their affiliated companies. This deal was awarded one of the top-ten merger and acquisition deals in the PRC for the year 2006 by China Mergers & Acquisitions Association. Norton Rose Group November

50 Accessing Chinese solutions for mining clients Advising Sinosteel on 1.48 billion AUS financing for takeover of Midwest. Project finance Mining Advising sponsors Equinox Minerals Limited on all aspects of the development and financing of the Lumwana copper mine and associated infrastructure in Zambia. This deal was named African Mining Deal of the Year by Project Finance, Mining Deal of the Year by Project Finance International and one of the Deals of the Year by Trade Finance, and involved the negotiation of an offtake contract with Chambishi Copper Smelter Limited (a subsidiary of China Nonferrous Metal Mining (Group) Co. Ltd and Yunnan Copper Industry (Group) Co. Ltd.). advising Talvivaara Mining Company Plc on the financing in respect of its development and commercial exploitation of the Talvivaara polymetallic deposits in Finland. The Talvivaara deposits comprise the largest known sulphide nickel resource in Europe with 340 million tonnes in classified ore resources. advising Oriel Resources Plc on the project financing for the development of its chrome deposit in Voskhod. advising the Government of Jordan and Central Jordan Uranium Mining and Nuclear Plant on the negotiation of a multi billion dollar project to mine uranium deposits in Central Jordan and develop and operate a major nuclear plant with the three shortlisted bidders Areva, Rio Tinto and China National Nuclear Corporation. advising the mandated lead arrangers in relation to the construction of the mine and associated infrastructure for the Essakane Gold Project. 50 Norton Rose Group November 2010

51 Norton Rose Group: track record Advising Anshan Steel & Iron on the US$1.2 billion project financing for the development of the Karara iron ore project located in the mid-west region of Western Australia, in its capacity as JV partner with Gindalbie Metals Ltd. The project debt is being arranged by an MLA group consisting of China Development Bank, Calyon and Bank of China. advising Moto Goldmines Limited on the construction and operational aspects of its gold mine in the Democratic Republic of Congo, including advising on construction procurement and equipment supply contracts. advising the lenders in relation to the proposed US$300 million financing of the Çaldağ nickel laterite mine in western Turkey. Dispute resolution Advising a major African Mining Company in an ICC arbitration subject to Belgian Law in a US$300 million dollar dispute following the purchase of a gold mine in the DRC. The arbitration was held in London and involved complex issues of alleged breach of contract, tort and fraud. The action was settled on favourable terms. advising in an arbitration claim over the failure by a Chinese seller to delivery various commodities on grounds of force majeure. advising a multinational diamond company defending an arbitration brought by a Russian counterparty in relation to the potential development of a diamond field in Russia. The dispute was worth US$100 million and was settled favourably. Norton Rose Group November

52 Accessing Chinese solutions for mining clients Advising a South African mine developer in an ICC arbitration concerning gold mining activities in Armenia, defending a claim for approximately US$10 million. advising an international metals trader on a copper offtake agreement with a mining company and, in particular, drafting their dispute resolution clause and advising on the applicable LME arbitration rules. advising in an arbitration claim for the delivery of sub-specification cadmium and aluminium. 52 Norton Rose Group November 2010

53 Contacts Contacts Norton Rose Group key contacts Raj Karia Partner Norton Rose LLP London Tel +44 (0) Martin McCann Partner Norton Rose LLP London Tel +44 (0) Norton Rose Group regional contacts Steve Abraham Partner Norton Rose LLP London Tel +44 (0) Douglas Hall Partner Norton Rose Australia Perth Tel [email protected] Jim James Partner Norton Rose LLP Shanghai Tel +86 (21) [email protected] Norton Rose Group November

54 Accessing Chinese solutions for mining clients Dan Marjanovic Partner Norton Rose Australia Sydney Tel [email protected] Ian McCubbin Partner Norton Rose Australia Melbourne Tel [email protected] Shaun McRobert Partner Norton Rose Australia Perth Tel [email protected] Yu-En Ong Partner Norton Rose (Asia) LLP Singapore Tel [email protected] Wang Yi Partner Norton Rose LLP Beijing Tel +86 (10) [email protected] Nigel Ward Partner Norton Rose LLP Beijing Tel +86 (10) [email protected] Nick Grandage Partner Norton Rose LLP London Tel +44 (0) [email protected] Daniel Metcalfe Associate Norton Rose LLP London Tel +44 (0) [email protected] 54 Norton Rose Group November 2010

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56 Accessing Chinese solutions for mining clients Norton Rose Group has been regarded for many years as having one of the leading legal practices servicing the mining sector. We now have a dedicated China mining team. We act for multinationals on China related matters and for Chinese counterparts on international deals. Accessing Chinese solutions for mining clients is the only guide of its kind focused on accessing Chinese capital for mining. It provides a framework within which to assess options for non-chinese clients.