FIRB and resources transactions: tenements, entities and the exploration exemption

The foreign investment regime treats a mining or production tenement as Australian land. That single classification is why resources transactions attract a zero dollar threshold where a comparable business acquisition would not, and why the exploration exemption, which looks like a wide carve-out, has a conversion trap sitting in the middle of it.

Tenements are land

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth), an interest in a mining or production tenement is an interest in Australian land. The acquisition of such an interest by a foreign person is both a notifiable action and a significant action regardless of value, which is to say a zero dollar threshold applies. There are two significant qualifications: acquisitions directly from an Australian government are generally excluded, so an initial grant of a tenement is treated differently from a transfer; and investors from certain agreement countries are subject to a higher indexed threshold instead.

The classification follows the substance of the right. A mining or production tenement is broadly a right to recover minerals, together with a right that preserves such a right, a lease under which the lessee has such a right, and an interest in either. Mere rights to a revenue stream are not a tenement interest, except where the right is an asset of a national security business or the tenement is national security land. That distinction matters for royalty and streaming structures, which can often be arranged so they do not engage the land limb, but the drafting has to be deliberate rather than incidental.

The exploration exemption and its limit

A foreign person who is not a foreign government investor may acquire an interest in an exploration tenement without it being a notifiable or significant action. The exemption is genuine, and it is the reason a great deal of exploration stage dealing proceeds without a FIRB process at all.

The limit is conversion. FIRB guidance confirms that, notwithstanding the exemption, the conversion of an existing exploration tenement into a mining or production tenement may constitute a new acquisition of an interest in a mining or production tenement, and therefore require approval. A foreign owned explorer that acquired its ground under the exemption is not exempt forever. It has a FIRB event waiting for it at the point of the mining lease application, which is precisely the point at which the project has become worth something and the timetable has started to matter.

The exemption also depends on what the tenement actually confers, and that varies between jurisdictions. Where a tenement gives a right to recover minerals, or converts into one without a further approval, the analysis is not settled by the name on the instrument. Read the grant, not the label.

Acquiring the entity rather than the tenement

• Foreign government investors. The acquisition of an interest of at least 10 per cent in the securities of a mining, production or exploration entity is a notifiable and significant action regardless of value. The 10 per cent figure catches placements, not just control transactions, and the definition of foreign government investor is wide enough to capture funds with substantial sovereign wealth or state owned enterprise participation.
• Private foreign investors. Acquiring securities in a mining, production or exploration entity may be a notifiable or significant action depending on the interest acquired, the value, and the character of the entity. The tenement classification flows through, so an entity whose assets are predominantly mining or production tenements is treated as a land entity rather than an ordinary business.
• National security. The national security limbs apply regardless of value and regardless of who the interest is acquired from, including where it is acquired from an Australian government. Where the tenement is national security land, or the target carries on a national security business, the ordinary exemptions do not save the transaction.

Exemption certificates

For a foreign person running a programme of tenement acquisitions, notifying each one separately is a real cost and a real timing constraint. An exemption certificate can cover a programme of acquisitions within a specified period and area, up to a specified aggregate consideration. Foreign government investors can apply for a certificate covering a programme of exploration tenement acquisitions, and certificates are also available covering acquisitions that would otherwise be notifiable or reviewable national security actions.

Certificates are not for small programmes. They will not usually be granted where it would be reasonable for the applicant to notify each acquisition separately. They are worth considering where the acquirer is building a position across a district and can define the area and the aggregate cost in advance.

What this does to your deal

• Assess FIRB at term sheet, not at signing. The condition precedent belongs in the term sheet, and so does the allocation of who lodges and who pays the fee.
• Build the timetable around the statutory decision period and its extensions. The period can be extended, and applicants routinely withdraw and resubmit where a review is running long. A deal timetable that assumes the shortest path will fail.
• Identify who the foreign person actually is. Tracing the acquirer’s ownership chain to establish whether it is a foreign government investor is a due diligence exercise, not a representation to be taken at face value. The aggregation rules catch structures that present as private.
• Do not let a placement create the problem. A placement that takes a foreign investor above a relevant threshold in a tenement holding entity is a notifiable action. It needs to be identified before the bookbuild, not after allotment.
• Farm-ins and joint ventures. An interest earned under a farm-in is an interest in the tenement. Structure the earn-in and the timing of the transfer with the FIRB analysis in view, and see our article on joint ventures and farm-in agreements in Australian mining for the surrounding structuring points.

How Luma Legal can help

We advise on FIRB exposure in tenement acquisitions, corporate transactions and capital raisings for resources companies, including the exploration exemption analysis, the conversion question, foreign government investor tracing and exemption certificate applications. Thresholds are indexed and the guidance is updated regularly, so the analysis has to be run against the position at the time rather than against last year’s note.