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Graphite and mineral sands exploration by foreign companies– Legal implications

23 Oct 2013 - {{hitsCtrl.values.hits}}

Two recent news items in the local print and electronic media on exploration activities by foreign companies prompted me to write this article to highlight the legal implications involved under the Mines and Minerals Act No 33 of 1992 (MM Act), Mines and Minerals (Amendment) Act No.66 of 2009 and Regulations made by the then Minister of Industries, Science and Technology under Section 64 to read with Section 34 of the Mines and Minerals Act No.33 of 1992.

I also refer to my article published in the Daily Mirror Business Features of 25 September 2013 under the Title “Revival of Graphite Mining in Sri Lanka –A Critical Review “where I brought to the attention of the relevant entities on the legal aspects related to foreign mining or exploration companies where a Mineral Investment Agreement (MIA) has to be negotiated with the Secretary of the Ministry charged with administering the GSMB( Ministry of Environment and Natural Resources).
This is a legal requirement for exploration, mining and further development of mineral based industries with foreign and local private equity participation. A case in point was the Eppawela Phosphate Project which was negotiated by a foreign company with the Secretary of the Ministry of Industries (under which the GSMB functioned at that time) which was then further negotiated with a Cabinet appointed Negotiating Committee chaired by the Secretary to the Cabinet .As a member of this Committee appointed by the Cabinet, I am aware that exploration was an integral part of the MIA.

The GOSL did not approve this project as the foreign company insisted on government guarantees on the foreign loan component. This project was revived as a BOI Project in the mid 1990’s and negotiations were conducted with the BOI and the ministry of industrial Development by a consortium of a US and a Japanese company on an equity basis with 10 per cent equity to the GOSL as free equity with carried interest. It is well known that this project was shelved after an injunction issued by the Supreme Court in 1 December 2000. The judgment was delivered by the Late Justice Amerasinghe.

In the above case the Respondents were (1) Secretary to Ministry of Industrial Development (2) BOI (3) GSMB (4) Central Environmental Authority (5) Project company Sarabhoomi (Pvt) representing the foreign consortium (6) Lanka Phosphate Ltd (7) another Sri Lankan company whose exploration and mining licenses were to be transferred to the Project company and (7) the Attorney General.

In the light of the above judgment I shall analyze now the legality of foreign companies undertaking exploration for graphite and mineral sands without negotiating a MIA.

Present exploration activities by foreign firms
The Daily FT of 11 October 2013 under the heading “Canadian firm signs deal for 113 Sri Lankan lump mining claims” that “Torch River Resources Ltd (Torch) has entered into an arms length non binding purchase and transfer agreement with Han Tal Graphite Ltd (Han) a Sri Lankan based holding company to acquire 113 mining grids with 36 historical mines and exclusive exploration licenses to explore and develop its wholly owned 113 sq kms mining claims in south west Sri Lanka “
A news item in the media on 18 October 2013 reported that a helicopter was seen flying over the north west of the Island and the Director General GSMB confirmed that it was an air borne electromagnetic survey undertaken by a foreign company .The report further stated that the exploration is done by a Chinese company and the results will be processed in Canada. With my experience as an exploration geologist for over 45 years, this survey will not pick up the thin lump graphite veins that are highly erratic and show a pinch and swell nature. It will indicate a regional anomaly and there was no need for such a survey as the area is known to contain graphite veins mined at shallow depths during the two world wars.

Legality to explore graphite by Torch and Han
It is interesting to examine in the first instance the legal status of Han, a Sri Lankan-based holding company which is presumed to have “exclusive exploration licenses for 113 grids”

Part 11 of the MM Act No.33 of 1992 Para 35 (1) and (2) related to issue of licenses state that “Subject to other provisions of this Act , every license issued under this section shall (a) be in such form and be subject to such terms and conditions set out in Sub section (4) (b) specify the limits of the area in respect of the licensee is authorized to explore for or mine transport , process trade in or export minerals (c) specify the minerals of the area in respect in which exploration , mining transportation ,processing , trading in or exporting is authorized (d) not be transferable or given as security (e) specify the duration of such license.

The GSMB should under the Act disclose the name of the original exploration license holder and the duration of the licenses issued and whether Han the Sri Lankan holding company has been issued exploration and mining licenses covering the 113 grids. Further there is no provision under the MM Act or the Regulations for a license holder to sell or trade an exploration or a mining license and if the GSMB has recognized such sale or transfer it has committed an illegal act and the license holder should also be punished under the Act.

Further under Para 41 (3) of the MM Act it is stated that “where the holder of the license being a partnership is dissolved the license shall be deemed to be terminated with effect from the date of dissolution of the partnership “

I am not aware what the status of the Sri Lankan based holding company is whether it was a partnership or not but in any case Torch is not legally entitled to carry out any exploration on a license issued to Han.

I would also like to draw the attention of the GOSL to Para 48 (1) of the MM Act which states that “No license to explore for minerals shall be issued in respect of any area exceeding 100 square kilometers”.

Further according the news report referred to above 113 sq kms has been given by GSMB to Torch to carry out an Air Bourne electromagnetic survey.

Exploration for mineral sands by Australia’s Iluka Resources
A news item in the local media on October 8, 2013 under the title “Australia’s Iluka Resources to mine Sri Lanka‘s mineral sands in northwest” stated that “”Iluka Resources Ltd an Australian company has bought a Sri Lankan company that is in business of sand mining.”

This purchase under the MM Act is illegal as such a purchase has to be approved by the GSMB and the Ministry of Environment. Further as elaborated above and related to graphite, Iluka Resources should negotiate a Mineral Investment Agreement (MIA) with the Secretary of the Ministry of Environment and any transfer of exploration or a mining license by PKD Resources (Pvt) Ltd is illegal. It must again be queried as to who held the original exploration license for PKD Resources Pvt Ltd and who were the directors of this company. It is known that Iluka Resources had blocked out large areas for exploration from early 2000 and the GSMB should report whether the exploration licenses were renewed after assessing the work carried out earlier every six months.

Conclusions
I also would draw the attention of the GOSL to the MM Amendment Act No. 66 of 2009 Para 6 (2) which repealed Para (e) of that section in the original MM Act to “advise the Minister on measures to be adopted for promotion, extraction, value addition through development of mineral based products on a commercial basis” Accordingly recognition of exploration by foreign companies for extraction of graphite and mineral sands without any plans for value addition is again contravening the MM Act as well as its amendments.

It is my contention that the GSMB as well as the BOI should request for a legal opinion from the Attorney Generals Department whether the involvement of foreign exploration and mining companies in exploring for graphite and mineral sands contravenes the MM Act, Amendments and Regulations without entering into a Mineral Investment Agreement with the GOSL and all exploration activities by foreign companies for graphite and mineral sands be suspended until this issue is resolved.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be contacted at [email protected] )

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Graphite and mineral sands exploration by foreign companies– Legal implications

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