Use of Dispute Financing in the Mining Sector

Use Of Dispute Financing In The Mining Sector

The mining industry is a high-risk sector. Not only are there financial risks involved but also many legal and regulatory risks. Particularly large mining companies that have overseas operations are at greater risk of falling victim to regulatory changes in the host state that force the company to halt or cease operations. After making such huge investments in a project, companies cannot abandon it. In such cases, disputes are sure to arise and a long, expensive legal battle follows. According to the 2021 edition of the International Center for Settlement of Investment Disputes (ICSID) caseload statistics, 24% of all cases registered are from the Oil, Gas & Mining sectors. That is the biggest chunk of the total caseload.

Many of these mining disputes remain pending for years. Disputes between investors and states can run very long and are extremely expensive. And the biggest risk is that victory is not always guaranteed for the company. A dispute not only puts millions of dollars worth of contracts on hold but could also result in heavy losses if you lose the case. Such losses can be tough to redeem from, even for major players in the industry. Even an ongoing dispute can totally throw your balance sheets out of order and disrupt cash flow.

That is why most mining companies rely on dispute financing to help them carry their cases forward.

What is Dispute Financing in Mining?

Dispute financing, which is also known as arbitration finance, is third-party funding to help mining companies pursue their arbitration against the opponent. The mining company may not be in a position to invest more funds to seek the necessary legal redress, after having raised a huge capital for the project in question.

Dispute financing can help in this regard by shifting the costs and risks of pursuing a legal dispute to a third-party financier. The financing individual or institution covers the costs of pursuing the litigation on a non-recourse basis. This means that in case the company loses the dispute to the other party, the financier assumes the downside risk and does not get paid back. The financier will only earn back its investment and a portion of the amount won in the lawsuit as returns, if the matter is successfully settled in favor of the mining company.

Dispute financing can be used in several different arrangements. A mining company may seek dispute financing for a single matter with great exposure and risk. Or it may obtain financing for multiple disputes with a portfolio arrangement. In the portfolio arrangement, the financier will cover the costs and risks of multiple disputes for the company. As the risk involved in each dispute is different, the financier may offer funding with a lower cost of capital.

How Can Mining Companies Benefit From Dispute Financing?

Dispute financing has several benefits, not just for companies that struggle to cover the finances required to pursue arbitration but also for companies that have enough funds. As the downside risk of the dispute is assumed by the investor, the mining company can pursue the case without having to worry about the outcome. Even for a company that has ample funds, paying out of its pocket for litigation can be straining and requires cutting down on funds in other critical areas of the business. With dispute financing, the company can address its legal costs more efficiently.

By using dispute financing in the mining sector, companies can –

• Shift the load of covering for arbitration costs to a third-party investor
• Manage their existing resources better without having to spend on pursuing the dispute
• Better manage the risks involved in the dispute as downside risks are assumed by the third-party
• Transform their legal counseling from a cost to a profit-making area
• Improve financial reporting as it eliminates a significant cost (with risks involved) with uncertain returns from the company’s accounts books.

Under what Circumstances is Dispute Financing Necessary?

If dispute financing is so lucrative, why doesn’t every company in every industry opt for it to handle its disputes? That is because there are certain factors to consider here. Since dispute financing is offered on a non-recourse basis and the investor has to assume the risk on behalf of the company, they will obviously be extra cautious. A third-party investor will only be willing to fund a dispute, where they risk losing the entire investment, only if they see merit in the claim made by the company.

Apart from the merit of the claim, the investor will also look at the capabilities of the legal counsel of the company who will be handling the matter. An experienced, expert legal and financial advisor is going to be very crucial to the success of the arbitration being pursued. If the company does not have reliable legal or financial counsel, the third-party investor risks losing all of its investment.

These are certain aspects to take care of before seeking dispute financing from a third party.

Usually, the circumstances under which a mining company would want to use dispute financing include –

• When a company (say A) has an ongoing dispute and is entering into an arrangement where this company is being purchased by another company (say B). If the claim is substantial, company A can attain dispute financing. Once the claim is won, all the proceeds from the litigation are divided among the company’s shareholders and the funding agency as per prior arrangement. This way, the dispute is not transferred over to company B after it acquires company A.
• When a company has sufficient funds, but still wants to keep the capital required for the dispute off the books. This is mostly done when the company has other more important business areas to fund.
• When there has been wrongful expropriation, where the company’s only or primary asset is being expropriated/ affected. The company requires additional funds to pursue the claim on its losses due to this wrong treatment by the state.
• When there are several disputes that a company is pursuing and needs to create a pool of funds to invest in all of the ongoing cases. The company can create a funding portfolio, the funds from which can be spent across the different disputes. But the returns are drawn from the proceeds of one or more high-value claims.

Consult a Financial Expert in Miami

The most important thing to consider in your pursuit of dispute financing in the mining sector is strong legal and financial counsel. You need someone who is experienced in commercial litigation support to make your case stronger. Investors will want to see maximum chances of a positive outcome from your claim before deciding to fund your dispute, and only an expert legal and financial advisor can ensure this.

Harriet Fox is one of the very few female forensic accountants in Miami, experienced in civil and commercial litigation. She has also earned her reputation as one of the best financial experts in divorces in Miami. Being a Certified Public Accountant, Harriet has experience working on commercial litigation with Fortune 500 companies and across various industries.

Get in touch right away to know more about how Harriet Fox - female forensic accountant and financial expert in divorces Miami - can help you with dispute financing in the mining sector.