In almost all countries and jurisdictions, all land containing revenue and mining potential (“Properties”) is legally reserved and held by the government of that jurisdiction. Mining corporations are often granted licenses or leases that stipulate certain conditions in exchange for a right to extract and exploit these Tenures. Governments often retain legal title to these Holdings to secure a right to future royalties (“Mining Royalties”) from chartered corporations that will often exceed the sale value of the Holdings.

It is common for corporations to acquire or hold licenses to exploit Holdings, however, they do not have the resources to carry out the exploration, evaluation and exploitation of these Holdings. A Farm In/Farm Out Agreement is a specific type of joint venture agreement that allows an entity licensed to exploit the Holdings (“Farmor”) to enter into an agreement with a third party (“Farmee”) to pool their resources to exploit the Holdings. Households.

The term “Farming In” is applied to the Farmee, who is “farming in” or “participating” in the project. Whereas the term “assignment” applies to the farmer who is effectively “assigning” or “licensing” his rights to the dwellings to a third party.

In a Farm In/Farm Out Agreement, the Farmor will typically license a portion of its rights to the Holdings and/or provide a percentage of the yield from the exploitation of the Holdings to the Farmee, who will generally provide consideration and/or commitments. to carry out work on the Homes in accordance with the terms of the Farm In/Farm Out Agreement.

Different Structures of Farm In / Farm Out Agreements:

Stock acquisitions:

A Farm In/Farm Out joint venture agreement may be structured as a partial acquisition of shares by the Farmee from the Farmor Company. This method of structuring a joint venture is usually the simplest. This method requires that a joint venture be an incorporated joint venture and Farmor will then be the incorporated joint venture.

In order to maintain the separation of the entities as is the common law requirement of a joint venture, the parties will ordinarily enter into a shareholders’ agreement that will determine the contributions, liabilities, profit-sharing provisions, and rights and obligations of each. of the parts.

We recommend that Farmee carefully consider Farmor’s circumstances, ie whether Farmor is a publicly traded company. Depending on the circumstances of the Farmor and the laws of the relevant corporation in the applicable jurisdiction, the Farmee may be involved in a business with onerous regulatory requirements.

Asset Exchange:

An asset swap is common in a Farm In/Farm Out deal when the Farmee may not have enough cash to meet the requirements stipulated by the Farmor. In theory, an asset swap is a relatively simple transaction, however, we strongly recommend that the assets to be swapped be carefully considered for their market value before the transaction is made.

Assignment of rights:

The most direct way for a Farmee to acquire a Farmor’s interest in Tenements is through an Assignment or License Agreement. In effect, the Farmor will grant the Farmee a license to exploit the Holdings and will receive a percentage of the return. This agreement will stipulate the contributions, liabilities, profit sharing and obligations of the parties.

Advantages, disadvantages and considerations of Farm In and Farm Out agreements

Farm In/Farm Out joint venture agreements have distinct legal characteristics. Before entering into a Farm In/Farm Out agreement, it is important to consider the advantages and disadvantages of entering into such an agreement. Before entering into any agreement, we strongly recommend that a thorough due diligence be carried out on the Holdings and the potential joint venture partner (for the Farmee) and/or the potential joint venture partner (for the Farmor) to ensure the security and certainty of the legal situation of each of the parties once the contract has been concluded.

It is important that the parties to any transaction consider their potential legal and business position. Any party to a Farm In/Farm Out agreement should seek clarity and certainty of their legal obligations and business position before entering into any agreement. With the following considerations in mind, a party can include the relevant contractual protections and take the necessary precautions to ensure that the business is successful:

farmer:

A Farm In/Farm Out Agreement can provide a Farmor with the following advantages and disadvantages:

advantage:

  1. Shared resources: the ability to receive the necessary resources to operate the houses.
  2. In order to meet required deadlines: Mining license leases often expire if the license holder (“Property Holder”) fails to complete exploration work within a stipulated period of time.
  3. Distribution of responsibility: any responsibility is distributed between the parties of the joint venture.

Disadvantages:

  1. Shared Control – The Farmor will generally have to relinquish some form of control to the Farmee as part of the joint venture agreement.
  2. Division of interest: The farmer will generally have to divide his interest in the income from the houses with the tenant.
  3. Assignment of the Right to the Holdings: the Farmor will generally have to assign its rights to some of all the Holdings to the Farmee so that the Farmee can carry out the exploration or exploitation works, as the case may be.

Farmee:

A Farm In/Farm Out Agreement can provide a Farmee with the following advantages and disadvantages:

advantage:

  1. Access to housing: Housing is not usually easy to grant. By entering into a Farm In/Farm Out Agreement with a Farmor, the Farmee will acquire a license to mine Tenements.
  2. Risk: There is no guarantee that the Holdings granted by the Government contain exploitable materials. A Farmee can reduce exploration risk and costs by entering into a Farm In/Farm Out Agreement with a Farmor in possession of Tenements on which exploration work has already been carried out.
  3. Income: In consideration for the work performed by the Farmee, the Farmee will generally share with the Farmee a percentage of the income received from the operation of the Homes.

Disadvantages:

  1. Capital Requirements: The Farmee must be able to pay the price of the consideration to the Farmor in accordance with the contract (if applicable) and also meet its obligations to carry out the works on the Holdings. This may require significant capital, as the Farmor generally has a stronger negotiating position since he holds the Tenements’ license.
  2. Strict Contractual Obligations: Farmer will generally be subject to strict obligations to Farmer for the operation of the Properties.

Key considerations:

We recommend carefully considering the following aspects before entering into a Farm In/Farm Out agreement:

  1. The commerciality of the terms of the joint venture;
  2. If the obligations are too onerous;
  3. If there is sufficient capital to meet the obligations of the contract; Y
  4. If there are enough benefits when entering into the joint venture agreement.

The above considerations are simplified. In any transaction there will be specific considerations arising from the circumstances that are unique to the transaction.