Eye on Business

Critical financial considerations in planning and negotiating an IBA

By Harvey Sands

Harvey SandsNegotiating a workable and enforceable Impact and Benefit Agreement (IBA) is a key step in bringing a mining project to production. However, many developers are unaware of and unprepared for the processes and challenges involved. The financial participation and economic benefit chapters of an IBA are often the most sensitive and taxing. These chapters include financial participation in production by the Aboriginal group, contracting opportunities and employment preference provisions.

First steps to a successful IBA

Many Aboriginal groups do not have the resources to negotiate a comprehensive IBA or to bear the costs of participating in long and complex negotiations. The Aboriginal party also typically requires financial, legal and technical advisors, which only increases overhead. The developer is usually asked to reimburse a portion of the costs incurred in negotiating and executing the IBA. This funding allows the Aboriginal party to engage necessary experts in areas such as environmental impact studies so it can understand and support the project during the environmental permitting process. The developer and the Aboriginal party should agree on how to govern the budget and finance the IBA process in advance. Furthermore, the developer should prohibit the funding it donates from being used in any future litigation that may occur between the Aboriginal party and itself.

The developer should raise awareness of the project’s benefits in affected communities to align the parties’ interests and maximize collaboration early in the process. This will allow for timely implementation and development of employment and training programs, and will allow Aboriginal businesses to bid on supply contracts for the project.

Share information

The developer’s ongoing provision of all relevant information, including current resource and reserve estimates, is a major factor in the quality and efficiency of the IBA negotiation process. This information is usually highly confidential and must be subject to strict non-disclosure provisions. Appropriate policies and procedures dealing with public company information must be recognized and adhered to by all parties.

Be prepared to make financial participation provisions

The developer should be aware of current national standards for Aboriginal financial participation. It is important to review the economies and realities of the mining industry and its inherent risks with the Aboriginal party. These include the capital intensive nature and the volatility of commodity prices, and the capital costs forecasted to make current operating decisions.

The developer must acknowledge that Aboriginal groups are now seeking true financial participation, in which they share the risks and returns of the project to a certain extent.

All parties must agree on mutually fair and equitable participation provisions that recognize the value of the project as well as the risks the developer is taking on. The developer should be prepared to initially discuss participation arrangements based on the project’s estimated net cash flow, as opposed to revenue-based participation. The latter fails to fully recognize the construction, financial, and operational risks of the project, as well as the developer’s requirement for capital expenditure recovery and repayment of related debt as an absolute priority, along with the Internal Rate of Return ­hurdle.

Tax considerations

Planning for the tax consequences of an IBA is a major area that is often overlooked. The developer wants to maximize project returns by ensuring that benefits provided to the Aboriginal parties qualify as deductions in income and/or mining duties. In order to secure maximum deductibility, all payments must be identified and characterized appropriately. The developer should pursue agreements to ensure support from the Aboriginal party that payments will be treated as deductions and also support limitations on government or similar Aboriginal authorities to increase project taxation. Similarly, the Aboriginal party can be assisted in minimizing any adverse tax consequences. The goal is to maximize economic returns on an after-tax basis for all parties.

Planning the IBA process, especially the financial participation and the equally important and necessary employment and contracting benefit provisions, is essential for controlling negotiation costs, maximizing Aboriginal collaboration and meeting project phase scheduling milestones, all of which are critical to the realization of the project. An IBA is best achieved and established when Aboriginal interests become ongoing and meaningful project proponents, and not opponents, in all critical community support, environmental impact and other regulatory matters.

Harvey Sands is a partner at RSM Richter. His practice includes representation of and counsel to Aboriginal and First Nations groups in IBAs, as well as in business investment negotiations. Regularly invited as a speaker at conferences, Harvey has lectured extensively on various Aboriginal advisory and taxation matters, real estate and business advisory topics in Quebec, Nunavut, Ontario, and Newfoundland and Labrador.

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