Indigenous ownership models gain steam alongside critical minerals rush

As this year’s Prospectors and Developers Association of Canada convention returned to its March slot in Toronto, welcoming nearly 24,000 attendees, the buzz was undoubtedly around critical and battery metals.

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THE VIEW FROM ENGLAND:

COLUMN | PDAC is over; time for would-be investors to reflect

BY DR CHRIS HINDE Special to The Northern Miner

During the event, the federal government doled out money for juniors to advance their projects (including Search Metals, E3 Lithium and FPX Nickel), and federal Natural Resources Minister Jonathan Wilkinson told reporters that the government would consider financial support for the construction of new mines as the United States has recently started to do.

BY ALISHA HIYATE

Adding to the momentum was Volkswagen’s post-PDAC announcement on Mar. 13 that the Germany-based automaker has chosen St. Thomas, Ont., as the location of its first overseas battery plant, rather than a U.S. location.

The critical minerals sector is certainly gaining steam, despite volatile, risk-off markets. But there’s still more work to do to win over one more essential partner — Indigenous communities whose traditional lands host the lithium, copper, uranium and other minerals that are so coveted.

To that end, the mining sector has been seeing more and more examples at the junior level where Indigenous communities are acquiring direct equity ownership in companies.

At a seminar hosted by law firm Fasken during the PDAC conference in Toronto, panellists noted that the topic of equity is a hot one at the negotiating table. Seen as a way of aligning the interests of companies and communities and speeding up permitting timelines, companies, governments, and communities seem to be equally eager to explore the possibilities of Indigenous equity ownership.

Ownership goes well beyond the now well-established practice of impact benefit agreements (IBAs), which lay out economic, employment, procurement and other benefits for Indigenous communities. Equity can be purchased, as the Tahltan Nation did with a $5-million investment in Skeena Resources in 2021, or it can be awarded as part of a participation agreement, as seen with Osisko Development recently granting shares to Williams Lake First Nation in relation to the Cariboo gold project in B.C.

There are potentially big benefits for both sides.

“On the proponent side, in addition to bringing into alignment interest, equity is also a tool that can be used to help secure the very important support and at times consent by the Indigenous community and to manage some of those project risks that arise in this regard,” said Sophie Langlois, an associate at Fasken.

Equity participation is also consistent with mining companies’ ESG and sustainability policies, including Indigenous participation and economic reconciliation.

While it is much more frequently seen in the energy sector on the asset level: transmission lines, oil and gas pipelines and renewable energy infrastructure (as noted in a recent Fasken bulletin), equity would also seem to be a no-brainer for mining companies looking to develop projects faster and gain the support and consent of Indigenous communities. There are reasons, however, why equity agreements are often discussed but more rarely implemented.

“It is important to recognize that equity is not a magic solution that we’re all looking for to getting our projects permitted, and can in fact be quite complicated to structure. It may not always be the preferred solution or option by an Indigenous community, nor for the proponent,” Langlois said. “In some instances, the parties may look to alternative structures and options that provide for revenue or profit sharing, or other ways to share in the economic benefits that may make more sense and may align better with the goals of the parties combined with some other oversight or participation.”

Langlois and other panellists also stressed that equity is not a replacement for IBAs and similar agreements, but a complement to them.

Sean Willy, president and CEO of the Des Nedhe Group, a development corporation of the English River First Nation in Saskatchewan, agreed that it’s not “one size fits all” solution.

“Everything depends on what the choice of the community is,” he said. “That’s what self-determination is.”

Willy noted that Indigenous communities want a “seat at the table,” which can mean a seat on the board or an environmental oversight role, as well as own-source revenue, which is key to long-term self-determination.

“There’s a risk that if you’re getting shares from a company and something else negates the value of those shares from an incident that happens in another part of the world — this is now having an impact on our own-source revenue. So I think they have to always find that solution that gets both of those,” he said.

Equity can also be a way of building capacity, and in some cases can be tied to a board seat. However, board seats bring up their own complications in terms of potential conflicts of interest and fiduciary duties to shareholders.

While equity is not the answer in all cases, companies should expect some type of ownership to be on the table.

“In every single conversation I’ve had with First Nations and negotiating agreements over the last few years, the question of ‘would you consider equity participation’ is part of the conversation,” said Zach Romano, a partner at Fasken. “Simply, if a company has a right to produce for resource extraction, the nation is interested in owning a piece of that right. That’s in some cases philosophically important to them.”

Without Indigenous consent and participation, critical minerals development can’t happen on the scale that’s needed. So it’s worth noting that Canada already has a leading model of Indigenous engagement — which at its best encompasses employment, education, training and procurement, community engagement and environmental stewardship — to build on.

As Willy said: “It’s probably one of the best in the world because it’s more fulsome, it’s more holistic and now we’re in those conversations with equity.” TNM

The middle of March is a depressing time in the calendar, and not just because it means the annual PDAC conference is over. Ever since William Shakespeare wrote Julius Caesar in 1599, we have associated this time of the year with a warning; “Beware the Ides of March” (Caesar was assassinated on Mar. 15, 44 BC).

We trace our calendar back to the Roman Republic, although the Romans did not number each day of the month from first to last, rather they counted back from three fixed points of the month. Kalends was day 1, Nones was day 7 and Ides was day 15 (‘Ides’ derives from the Latin for divide). Hence, days 2-6 in every month were described as “before the Nones,” days 8-14 were “before the Ides,” and the remainder were “before the Kalends” of the next month.

In Rome, the Ides of each month was a deadline for settling debts, and the Ides of March (Idus martiae) was marked by religious ceremonies. Despite Shakespeare’s best efforts, the middle of March is not historically a particularly risky time of the year for investors. Nevertheless, because the Prospectors & Developers Association of Canada has just held its convention, it is an opportune time to remind potential mining investors of the risks involved.

For equities generally, strategists at Morgan Stanley are amongst analysts to have warned that this is a “high risk month for the bear market to resume.” Morgan Stanley recently told clients that, after a slew of data showing the economy in a much more precarious position than previously believed, the stock market “could be poised for another forceful plunge in March.”

Mining equities follow a different cycle from shares in other industries, of course, but it is a cruel one.

Taking a long-term perspective, demand for iron ore, copper and other energy transition metals seems assured. Unfortunately, rising demand for mined commodities inevitably encourages investment in new supply. There is then pressure on the price of metals and minerals, which has a disproportionate impact on mining profitability (given that many of the mine development costs are fixed). Funds raised to finance an increase in production can turn out to have been inefficiently deployed, forcing companies to alter their development plans and reduce costs.

As I wrote in this column two years ago, investors need to be wary of what they’ve heard during corporate presentations at the Metro Toronto Convention Centre.

For many professional investors, the calibre of the manage- ment team at a mining company is the most important element in an investment decision. However, the location of that company’s assets comes a close second because mining is a politically vulnerable business (unlike factories, you cannot move mineral deposits); witness First Quantum Minerals’ recent travails in Panama.

Related to the location issue is whether the company has a licence to operate and benefits from ongoing local support. This will be linked to the company’s operating track record, particularly in that region, and how it has handled public relations.

Investors also need to decide on what level of diversity they require in terms of the commodities and countries in which the target company operates. Corporate concentration on a single metal and/or jurisdiction allows greater focus and expertise, but is of course riskier (the ‘eggs in one basket’ adage springs to mind).

Size also matters. Larger companies are better insulated from market shocks, and can ride out any drought in the availability of finance. Investors in junior companies with a late-stage development, or mine, should also be aware that high cost operations can become suddenly uneconomic if the metal price falls. Investors should look for management with ‘skin in the game’ (i.e. they own equity, rather than just share options), are able to articulate their plans to create shareholder value and have the ability to generate investment returns (preferably with experience in the operating country/ commodity).

In mining there is a danger that the marketing hype, particularly for gold explorers, runs well ahead of the asset’s potential. In particular, investors should watch out for ‘near-ologists’ (deposits are not necessarily continuous) and those executives who follow trends (companies that jump between metals/countries).

Avoid promoters (generally speaking, the more gold on them, the less is likely in their deposit), perpetual optimists (management need to know when to bail out) and companies with overpaid executives (who should only be rewarded for results).

March is named after Mars, the Roman god of war. As Martius, it was the first month of the Roman year until 153 BC, and marked the beginning of the season for warfare. An auspicious time then for investors to go into battle but they should avoid Caesar’s fate by staying wary, and listening to whispered warnings. TNM

—Dr. Chris Hinde is a mining engineer and the director of Pick and Pen Ltd., a U.K.-based consulting firm. He previously worked for S&P Global Market Intelligence’s Metals and Mining division.