FIRB Reforms Article Series – Part 5: Mining and resources
In this edition of our FIRB Reforms Article Series we consider how the Commonwealth Government’s proposed changes to the foreign investment rules, as set out in the discussion paper released on 5 June 2020 (Discussion Paper) and the draft legislative amendments released on 31 July 2020 impacts Australia’s foreign investment framework in respect of the mining and resources sectors.
What will be of interest to companies operating in these sectors is the proposal for FIRB to loosen its tight grip on royalties arrangements and to clarify its position with respect to certain exploration licences, to address what are seen as inconsistencies and uncertainties in FIRB’s current screening process. In contrast, we also delve into why the outlook is not as favourable for proposed investments into critical minerals.
By way of background, as we have discussed previously (here and here), on 29 March 2020 the Federal Government imposed a temporary $0 threshold for all proposed foreign investment in an attempt to manage the risk of predatory foreign investment during the COVID-19 downturn. It is expected that these temporary measures will be wound back from 1 January 2021 at the same time as the introduction of the new rules referred to below.
One key proposed amendment to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), which will be welcomed by those operating in the mining and resources sector, is the exemption of the acquisition of certain revenue streams from the operation of the FATA. That is, the acquisition of a revenue stream (for example, through the grant of a royalty) in relation to mining and production tenements will not constitute an interest in land under the FATA where they do not provide a right to occupy the land or exert direct control or influence over the land.
This proposal will provide some much needed clarity in light of the recent inconsistencies in the way FIRB has approached the question of whether the grant of a royalty constitute interests in Australian land.
Secondly, the Discussion Paper proposes that the acquisition of an interest in an exploration licence will generally be exempt from FIRB’s screening processes under the FATA. This is already the case in most situations where the investor is a private foreign investor (i.e. not a foreign government investor) but the proposed change is designed to ensure that certain exploration licences that do provide some rights to occupy the land (for example, Northern Territory and offshore exploration tenements) are not considered to be interests in land for FIRB purposes.
However, this will not be a blanket exemption. Foreign government investors will still require FIRB approval for the acquisition of an interest in an exploration tenement as a direct investment into the assets of an Australian business. Similarly, any investment into exploration licences that raises national security concerns will likely be subject to FIRB approval under the new national security test.
A rocky outlook for mining and energy?
Critical minerals in a critical condition
Since the release of the Discussion Paper which first raised the concept of tighter FIRB rules for investments into ‘sensitive national security businesses’ (which we have delved into here), the release of the draft amending legislation has allayed some of the fears in the mining sector by defining ‘national security business’ reasonably narrowly. Specifically, businesses operating in the mining and resources sectors whose operations are associated with critical minerals (such as lithium, nickel, magnesium, silver and copper) will not be classified as national security businesses unless they supply critical goods that are intended for a military end‑use by defence and intelligence personnel in activities relating to Australia’s national security, or the defence force of another country in activities that may affect Australia’s national security.
However, the existing national interest test will remain unchanged and this continues to raise issues in the context of foreign investment into critical minerals. Relevantly, in January 2020 the Federal Government established the Critical Minerals Facilitation Office (CMFO), a body advocating for Australia’s critical minerals sector. With respect to foreign investment, its efforts include progressing cooperation between government bodies and the private sector in both the United States and Canada. Flowing from these efforts in April this year the Council of Australian Governments’ (COAG’s) Critical Minerals Work Plan endorsed investment into Australia’s critical minerals sector as a vital part of the country’s efforts to recover from the economic impacts of COVID-19. Despite this signalling from the Federal Government, history has a tendency to repeat itself – April saw the Treasurer’s rejection of both Baogang’s $20 million investment into Northern Minerals and Chinese lithium investor Yin Tianyi’s $14.1 million subscription in AVZ Minerals.
The proposed changes to the FIRB rules also provide the Treasurer with ‘call-in powers’ (which we have discussed here) which would enable the Treasurer to ‘call-in’ investments even after an acquisition has completed. An associated ‘last resort’ power would allow the Treasurer to order the divestment of the investment if a threat to Australia’s national interest is discovered or emerges even after the grant of FIRB approval. Again, these powers are limited to investments that raise national security concerns, but this is a broader concept than the ‘national security business’ referred to above and may well extend to investments into critical mineral projects.
What this means for those operating in the mining and resources industries in Australia is that early engagement with FIRB will become more important than ever before, particularly given that FIRB’s temporary COVID-19 measures extend the time frame for the Treasurer’s decision-making to a 6-month period. Mining and resources companies may be well advised to voluntarily notify FIRB of their proposed transactions, ideally prior to entering any relevant agreements, to avoid the possibility of the transaction becoming subject to the Treasurer’s ‘call-in’ power.
If you would like to discuss how these proposed reforms could impact your current or proposed investments in the mining and resources sector, please reach out to one of our specialists in McCullough Robertson’s FIRB team below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.