Flying solo or teaming up? Structuring your mining venture

Developing an exploration or mining project involves significant investment and requires capital and capability. For smaller operators in particular, it is important to consider the potential benefits of establishing a joint venture to carry out a project, rather than going it alone as a sole operator.

A joint venture is a commercial arrangement between two or more parties which is formed for the purpose of developing a specific project. By entering into a joint venture, each of the parties can leverage the other’s resources or capabilities to expand existing operations or enter a new market, while sharing the risks and rewards.

In Part 6 of HopgoodGanim Lawyers’ Mining Project Lifecycle Series, we outline the key considerations for assessing if a joint venture is suitable for your project.

Sole operations: Rewards and risks

A sole operation structure involves a single party conducting all project activities independently. This structure is common among larger companies with established capabilities and sufficient capital to manage exploration and development on their own.

Sole operations are often used in mature or lower-risk areas, or where the operator already holds tenure or infrastructure and has the resources to exploit and produce minerals from the project.

A key benefit of developing a project as a sole operator is retaining full control over operational and strategic decisions, ownership of the tenements, production rights and other assets and receiving the full benefits of the project. A sole operation is also simple in structure, management, and regulatory compliance.

However, while a sole operator maintains full control, they also bear 100% of the cost and risk of the project. Through a sole operation, there is no ability to draw on the technical or geographic expertise of others, and there may be difficulties in accessing further capital.

Why start a joint venture?

Costs contributions

A key attraction of joint ventures is the ability to share costs, profits, and decision-making power to the extent of each party’s interest in the project.

Common joint venture arrangements include:

• Equity-based participation: Parties contribute capital or services and receive a share of production or profits.
• Earn-in (or farm-in) rights: A party acquires an interest (typically, in the mining tenement itself) upon reaching defined expenditure or technical milestones.

These arrangements are documented in an agreement, such as a farm-in joint venture agreement (in the case of earn-in rights).

Joint venture agreements (particularly in the exploration phase) may include ‘free carry’ (or sole funding) provisions, which require one party to fund all project expenditure until a decision to mine is made. Such arrangements may be useful where a project owner wishes to divest an exploration project but retain the right to participate (on a joint venture basis) when it comes to productive mining. The alternative (subject to the terms of the arrangement) is that a party may be ‘diluted’ down if they do not contribute when capital calls are made after the ‘free carry’ period ends.

Joint venture agreements will typically include ‘dilution’ clauses, which provide that if a party fails to contribute capital when a capital call is made, its interest may be reduced proportionately. This incentivises timely contributions from participants. Capital calls are generally decided by the management committee formed under the joint venture agreement, so it is important to understand who has the power to make decisions and if the joint venture party with the majority interest can essentially drive the project forward, determining when capital calls are made and how much needs to be contributed by each joint venture party.

Risk sharing

Another benefit of entering into a joint venture is the opportunity to share risk, including financial, technical, regulatory, environmental, or reputational risks. Risk sharing allows the joint venture participants to pursue opportunities that might be too large or uncertain to tackle individually, particularly in early-stage or capital-intensive projects.

The allocation of risk between the parties must be clearly articulated in the joint venture agreement, otherwise disputes, cost blowouts, or other difficulties in developing the project may arise. In most joint ventures, risk is allocated pro rata to each participant’s joint venture interest to align risk with reward. Usually this is by way of an indemnity given by the joint venture parties (severally in accordance with their interests) in favour of the manager of the joint venture, as it is the manager that operates the joint venture project on behalf of the participants.

A joint venture agreement may also include sole risk provisions, which allows one party to proceed with a specific activity at its own cost and reward.

Capabilities

In a joint venture, each party brings not only capital, but also a unique set of technical, operational, managerial, and geographic capabilities. Effectively leveraging the capabilities of each participant in the joint venture is crucial to maximising project success.

Aligning capabilities and clearly setting expectations around their deployment is critical. Joint venture agreements should explicitly address who does what, how those capabilities are contributed or compensated, and how performance is monitored or enforced.

Unincorporated vs incorporated joint ventures

Joint ventures can be ‘incorporated’ or ‘unincorporated’. An incorporated joint venture involves establishing a separate legal entity, in which the joint venture participants are shareholders, to carry out the project. An unincorporated joint venture involves the joint venture participants working together, but in their own capacity as separate entities.

It is important for joint venture participants to consider the relevant structures, the suitability of those structures from a commercial and tax perspective and to ensure such arrangements are appropriately documented. Legal advice should be obtained to ensure joint venture agreements, shareholder and operations agreements reflect the commercial intent of the parties, and to ensure the risks between the joint venture parties are allocated appropriately and to protect the joint venture party’s rights and interests.

Unincorporated joint ventures

Unincorporated joint ventures are the more common structure in Australian mining and exploration projects. Key features of an unincorporated joint venture include:

• that the arrangement is governed by a joint venture agreement, which deals with contributions, management, risk allocation, decision making, and dispute resolution;
• the appointment of a party as the operator or manager, responsible for day-to-day activities, with oversight by a management committee; and
• each participant accounting for its own share of revenue, costs, assets, and liabilities.

As no separate legal entity is established, unincorporated joint ventures provide greater flexibility and are particularly well suited to exploration-stage projects where the ability to enter, earn-in, or exit easily is commercially desirable. When an exploration project reaches the mining stage, usually upon obtaining a bankable feasibility study, the joint venture parties may enter into a mining joint venture agreement or profit sharing arrangement.

Incorporated joint ventures

Incorporated joint ventures are more common in later-stage or production-phase projects, where governance, financing, and risk management require a more structured vehicle. Key features of an incorporated joint venture include:

• the joint venture company holds title to the project assets and contracts in its own name;
• the participants’ liability is generally limited to unpaid share capital and guarantees; and
• governance is managed through a board of directors, governed by a shareholders’ agreement.

Due to the creation of a distinct legal entity, incorporated joint ventures offer continuity, and suitability for third-party financing, but are less flexible than an unincorporated joint venture and generally involve additional regulatory obligations and costs.

Tax considerations

The tax treatment of joint ventures varies significantly depending on the joint venture structure, income flows, the jurisdiction and other considerations. Joint venture participants should seek expert tax advice when evaluating the most appropriate joint venture structure for their project.

Generally, in relation to unincorporated joint ventures:

• each participant includes their proportionate share of income and expenses in their own tax return;
• losses may be offset against other income, enhancing tax efficiency, especially in early exploration;
• GST treatment is simplified due to direct ownership of inputs and outputs; and
• there may be duties concessions that apply.

In relation to incorporated joint ventures:

• the company tax rate will apply (30%, or 25% for base rate entities);
• the joint venture company may distribute profits via dividends; and
• losses stay with the company and cannot be transferred to shareholders.

Tax advice should be obtained in relation to whether an incorporated joint venture or unincorporated joint venture is suitable.

Key terms of joint venture agreements

It is essential that the rights and obligations of joint venture participants, whether the joint venture is incorporated or unincorporated, are documented in an appropriate agreement to provide protection and certainty to each party.

The long lifecycle of a mining project requires the evolution of commercial arrangements, and accordingly the terms which are crucial for a successful joint venture agreement will vary, depending on the stage of the project.

Exploration joint ventures

Exploration joint ventures generally involve staged earn-in agreements with a party funding work on a tenement to gain an interest in that tenement.

Exploration stage joint ventures are usually unincorporated, with flexibility preferred. There is often an emphasis on exit options available to the participants, such as the ability to farm-out or otherwise withdraw from the joint venture if a decision to mine is unlikely to be made.

An exploration joint venture agreement should include robust provisions relating to:

• the transfer or creation of the joint venture interest (and whether a joint venture party may hold a legal registered interest in the tenements);
• the milestones required for a joint venture party to obtain its interest in the joint venture, for example, the minimum expenditure commitment required to be expended by a joint venture participant;
• sole funding or free carry arrangements (if any) and the duration of such obligations (for example, until a pre-feasibility study is obtained or a decision to mine is made);
• compliance with tenement conditions, including responsibilities for keeping tenure in good standing;
• the appointment of a manager and management committee, which will generally comprise representatives from each participant, and committee decision-making processes (e.g., whether decisions require a majority vs unanimous vote);
• exploration work program approvals and budgets, including each participants role in designing, approving and implementing work programs;
• exit mechanisms such as withdrawals (during the earn in period or afterwards) and dilution rights (including the grant of any royalty on dilution where the interest of a joint venture party falls below a specified threshold); and
• responsibility for compliance with relevant laws (including mining and environmental laws and regulations, including if applicable, any authorisations to permit third party mining or to lodge reporting documents with the relevant department); and
• the terms of a mining joint venture if a decision to mine is made.

Mining joint ventures

Once an exploration joint venture reaches the mining stage, the joint venture parties may, subject to the terms of the existing joint venture, enter into a mining joint venture agreement. Mining joint venture arrangements generally provide for:

• the ongoing management of project expenditure;
• funding obligations such as cash calls, and default provisions;
• product marketing, off-take agreements and other third-party agreements, which require careful alignment between participants;
• exit strategies including buy-outs; and
• mine closure and rehabilitation liabilities, which may be significant and must be properly allocated.

Considerations

Choosing the right structure for an exploration or mining venture is an important decision that should be informed by commercial objectives, tax considerations and benefits, the stage of development, and the regulatory context of the project. Sole operations offer certainty and control, but joint ventures (particularly unincorporated joint ventures) provide flexible and efficient frameworks for sharing risk and pooling resources, especially in an exploration context.

As a project matures, structures may evolve, and parties should remain alive to the legal and tax implications of converting an unincorporated joint venture into an incorporated entity or adjusting equity interests of the participants.

Joint venture success requires thoughtful planning, comprehensive agreements and a shared vision.

Legal advisors play a critical role in drafting and negotiating joint venture agreements, navigating tax and regulatory frameworks, and ensuring alignment between commercial intent and legal form.

For further information or assistance relating to joint ventures, please contact our Resources & Energy team.