Political risk appears to have reared its ugly head in an unfortunate manner in Iran at the Mehdiabad zinc project. Lundin Mining (International Mining, Januray 2007), which has a 7.5% indirect interest in the project though its holding of 19.9% in Union Resources, describes Mehdiabad as the world ranked No. 1 zinc project. Controversially, Union received a letter on December 5 from the Iranian Mines and Mining Industries Development and Renovation Organization (IMIDRO), an Iranian government partner in the project, signed by its Chairman Mr A. A. Harati Nik.
The letter refers to the agreements concluded with General Iranian Mining Co, and says “we hereby as the legal Successor of GIMCO, declare the termination of the following Agreements because of failure of your Company to fulfill and complete your obligations under the Agreements.” Those noted are the Foundation and Basic Agreements of 1999, and the Management and Engineering Services Agreements of 2001.
Union is of the opinion that “IMIDRO has invalidly issued the purported notice of termination and the Board is taking urgent steps to clarify and resolve the situation and ascertain the impact of the letter on Union’s investment in the project.
“Union is further of the opinion that the company has complied with all of its obligations under the Foundation Agreement, the Basic Agreement and the Management Agreement, and that no basis exists for termination. Whilst Union is a signatory to the Engineering Services Agreement, it relates to work carried out on the Project by the other partner to the Joint Venture, Itok GmbH.”
The Mehdiabad project has operated as an incorporated joint venture through Mehdiabad Zinc Co (MZC) since 2003. Union holds 25% of the issued shares in MZC and when loans convertible to equity in MZC are added, has a beneficial interest in excess of 40%. The agreements in question are the principal agreements through which Union holds its interest in the project.
The Foundation Agreement is an agreement between the MZC shareholders and the Iranian Ministry of Mines and Industry. It covers the conduct of exploration and feasibility studies, and the exploitation and processing of the mineral resources. The Foundation Agreement commits the Ministry to issuing among other licences, the Exploitation Licence to MZC. Union’s view is that this agreement cannot be terminated by IMIDRO.
The Basic Agreement sets out the commercial arrangements relating to the joint venture. Article 9.2.2 provides that the joint venture company MZC would deliver a feasibility study within the first two years. Union advises that it did produce a pre-feasibility study within the first two years. “Any right for GIMCO (the original partner and signatory to the Basic Agreement) to terminate this agreement should MZC have failed to complete the study in a format acceptable to international financial institutions within two years, is subject to Article 5.2.4, which states that [“if MZC has worked continuously on the project and for valid technical reasons needs more time to complete the study, then the parties will agree to a reasonable extension.”].
Union notes that IMIDRO is not a signatory to the Basic Agreement and that Union and MZC continue to work on the project. Union says it “is currently planning the first stage of the development.
“The pre-feasibility study and all subsequent studies have shown that the project is both world-class in size and metallurgically complex. Further, the development of the project requires substantial capital investment. To secure the amount of capital required internationally requires extensive studies. Because of the nature of the project and the fact that MZC has worked and is still working continuously on the project, Union is of the view that MZC either has been granted a further extension of time by all parties to the Basic Agreement, or that circumstances clearly exist which would make any request by MZC for such an extension of time to complete the study not unreasonable, and in fact is the fastest way for IMIDRO to ensure the development of the project.
“In particular, the project is now close to being ready to be developed and Union and MZC are the lawful owners of all the intellectual property associated with the project, including all work to date on the study. In Union’s opinion it would not make sense for IMIDRO to do other than encourage Union and MZC to finalise their work and start the development at the earliest opportunity, which Union is prepared to do.
“In the opinion of Union’s Board of Directors, terminating the Basic Agreement and attempting to develop the project, without access to the extensive international standard technical information that has been gathered under Union’s management would be very difficult to achieve.
“The Management Agreement sets out the terms under which Union provides project management services to the joint venture. This agreement can only be terminated by board resolution of MZC and cannot be terminated by IMIDRO.
“Union notes that IMIDRO has not proposed the termination of the Shareholders’ Agreement which relates to the activities of the joint venture company, MZC. Union therefore assumes that at this time IMIDRO is supporting MZC as a company continuing to operate under this agreement and in accordance with the Iranian Commercial Code. However, MZC will still need to hold the Exploitation Licence in order for the project to be financed.”
Union notes that “IMIDRO’s subsidiary company IMPASCO, which currently holds the Exploitation Licence, has been called upon to transfer the Exploitation Licence to MCZ as required under the Foundation Agreement and Basic Agreement, and to date has failed to do so.”
Union is considering its position in relation to both the Agreements “and the notice of purported termination from IMIDRO. Union has experienced difficulty with its joint venture partners in the recent past, notably with respect to the transfer of the Exploitation Licence to MZC and in the approval of its expenditure by MZC made under the Management Agreement and the conversion of this expenditure to equity in MZC as disclosed in the June 2006 and September 2006 quarterly reports.”
Union holds a current political risk insurance policy in respect of its investment in Iran and has notified the Australian Government Export Finance and Insurance Corporation and the Ministry of Economic Affairs and Finance, Organisation for Investment Economic and Technical Assistance to Iran of the letter received from IMIDRO.
On December 6, Union delivered a letter to the office of the Minister of Mines and Industry of the Islamic Republic of Iran requesting an urgent meeting to clarify the issues raised. Union’s representatives in Iran will shortly meet with IMIDRO “to discuss this development and with a view to seeking withdrawal of the purported termination letter and seek to resolve all outstanding issues between IMIDRO, Union and MZC. It is hoped that these meetings will be held prior to the end of 2006 and Union will make an announcement at that time. In any event an announcement will be made at the end of 2006, even if no progress has been made. Union will endeavour to find an amicable solution that will allow the Project to proceed in accordance with its world class potential as quickly as possible.”