How juniors can benefit from investor-state dispute schemes

Resource nationalism is not a new phenomenon, but it continues to pose investment risks for companies involved in mineral extraction projects in Africa and beyond. The recent conclusion of a settlement agreement between Vancouver-based junior Winshear Gold (TSXV: WINS) and the United Republic of Tanzania demonstrates the merits of the Investor-State Dispute Settlement (ISDS) process.

ISDS not only gives mining companies protection against the revocation of their mineral licences, but also shows governing states how a return to the rule of law can benefit their societies as a whole.

Winshear announced on Oct. 16 that it had ended its longstanding dispute with the Tanzanian government regarding the company’s SMP Gold Project in the country’s southwest. Its previous investor-friendly mining regime, introduced in 1998, was suddenly overhauled in July 2017 when Tanzania’s then-president, the late Dr. John Magufuli, introduced far-reaching legislative changes in pursuit of a resource nationalist agenda.

Among other things, the new mining laws introduced an export ban on all mineral concentrates, onerous increases in local content requirements and mandatory government stakes in all mining projects. They also abolished the legal basis for retention licences, and in January 2018 Tanzania cancelled all existing retention licences and returned the corresponding rights to the government.

Winshear was one of the many foreign investors affected. It lost its licences over the one-million-resource-ounce SMP Gold Project, into which it had invested significant amounts over more than a decade. After Tanzania announced a public tender for the same licence areas in December 2020, Winshear initiated the ISDS process in 2021 under the international bilateral investment treaty (BIT) between Canada and Tanzania. The ISDS mechanism in the BIT allowed Winshear – a Canadian investor – to bring arbitral proceedings directly against Tanzania before the International Centre for Settlement of Investment Disputes, an arm of the World Bank.

The final hearing was held in February 2023, and in October 2023, Winshear and Tanzania settled the dispute amicably for US$30 million before the tribunal rendered its award. The settlement allows both sides to move on. From a broader perspective, it shows the benefits of the ISDS process for both miners and states.

The typical vulnerabilities of junior miners – limited resources, lack of diversification and limited bargaining power – make them susceptible to the impacts of resource nationalism, even if they are not usually targeted directly by specific government measures. Large multinationals can often protect themselves contractually via sophisticated investment agreements. Such agreements contain stabilization clauses preventing the host state from changing the regulatory environment to the detriment of the investor, and arbitration clauses providing recourse to international arbitration in neutral jurisdictions.

However, investment agreements are usually only on offer once a project reaches the development stage and if the investor has the necessary bargaining power. Junior miners are left to rely on investment treaties containing an appropriate ISDS mechanism, if they want any protection against a resource nationalist political agenda.

Weigh all options

Unfortunately, junior miners frequently prioritize tax considerations over investment treaty protection when establishing their ventures in risky jurisdictions. Tax incentives and favourable fiscal regimes can, indeed, be alluring. But a narrow focus on taxation ignores the broader panorama of risks ahead. By securing treaty protection from the outset, miners can protect their investments against resource nationalism and other unfair treatment by the host state.

Having adequate treaty protection in place is particularly important during the delicate period between exploration and production, when resource nationalism often rears its head. However, it is important to consider treaty protection early: treaties will not offer protection where an investor restructures to take advantage of ISDS only after the host state has taken measures giving rise to a dispute.

Junior miners – often optimistic by the very nature of their business – hesitate to initiate legal recourse against host states, even when victims of resource nationalism. They often believe they will be able to resolve the situation by negotiation with the host state. Even if that is the case, early specialist legal advice is crucial. Investment treaties, including those protecting Canadian investors, often contain limitation periods after which claims will be time-barred.

Mining companies should also be careful before proceeding through local courts: under some treaties investors will waive access to arbitration if they plead the same case in the local courts (so-called fork-in-the-road provisions). Others require an investor to exhaust local remedies before they can start arbitration, unless doing so would be futile.

Typically, a dual-track strategy, where the investor seeks legal recourse through ISDS and in parallel continues settlement negotiations, is the most effective way to obtain a favourable result, as the Winshear settlement demonstrates.

Changes in government during the ISDS process can open windows of opportunity for an amicable settlement. They often change a state’s incentives, including on political strategy, reputation management, and economic considerations.

Resource nationalism will have crippling consequences for near-term investment in the host state, often precipitating an economic downturn with long-term effects. Participation in the ISDS process, followed by an amicable settlement, is a powerful signal to the international investment community of a country’s adherence to the rule of law, predictability and openness to business. These are all features that will benefit societies as a whole, not just foreign investors.

Marc Veit is a partner in the international disputes firm LALIVE. He represented Winshear in the proceedings against Tanzania.