In almost all countries and jurisdictions, all land that contains mining profits and potential pending (“Tenements”) is reserved and legally held by the government of that jurisdiction. Mining corporations often receive licenses or leases that stipulate certain conditions in exchange for a right to mine and exploit these Tenements. Governments often retain legal title to these Tenements to secure the right to future royalties (‘Mining Royalties’) from licensed corporations that will often exceed the sale value of the Tenements.

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

The term “Farming In” is applied to the Farmee, who is “cultivating” or “entering” the project. Whereas the term “Farming Out” applies to the Farmor that is effectively “cultivating” or “licensing” its rights to the Tenements to a third party.

In a Farm In / Farm Out Agreement, typically, Farmor will grant a portion of its rights to the Tenements and / or provide a percentage of the performance of the holding of the Tenements to the Farmee, who will generally provide consideration and / or commitments to carry out works on the Tenements in accordance with the terms of the Farm In / Farm Out Agreement.

Different Farm In / Farm Out agreement structures:

Acquisitions of shares:

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

To maintain the separation of entities as is the common law requirement of a joint venture, the parties will commonly execute a shareholders agreement that will determine the contributions, liabilities, profit-sharing provisions, and rights and obligations of each party. .

We recommend that Farmee carefully consider Farmor’s circumstances, that is, if Farmor is a publicly traded company. Depending on Farmor’s circumstances and the relevant corporate laws in the relevant jurisdiction, Farmee may be entering a business with burdensome regulatory requirements.

Asset exchange:

An asset swap is common in a Farm In / Farm Out deal when Farmee may not have enough cash to meet Farmor’s requirements. In theory, an asset exchange is a relatively simple transaction, however, we strongly recommend that the assets to be exchanged are carefully considered for their commercial value before making the transaction.

Assignment of rights:

The easiest way for a Farmee to acquire a Farmor’s interest in Tenements is through an Assignment or License Agreement. In effect, Farmor will grant Farmee a license to mine the Tenements and 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 different legal features. 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 thorough due diligence be conducted on the Tenancies and the potential joint venture partner (for Farmee) and / or the potential joint venture partner (for Farmor) to ensure safety and certainty. of the legal position 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 about its legal obligations and business position before entering into any agreement. By taking the following considerations into account, a party can include the relevant contractual protections and take the necessary precautions to ensure that the business is successful:

Farmor:

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

Advantage:

1. Share resources: the ability to receive the resources necessary to exploit the Tenements.
2. In order to meet the necessary deadlines: Often times, mining license leases will expire if the licensee (“Tenement Tenement”) does not carry out 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: Farmor will normally have to hand over some form of control to Farmee as part of the joint venture agreement.
2. Interest Division: The Farmor will normally have to divide its interests in the benefits of the Tenements with the Farmee.
3. Assignment of the right to the homes: Farmor will normally have to assign its rights to some of the homes to Farmee in order for Farmee to carry out exploration or exploitation work, 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 often not easily granted. By signing a Farm In / Farm Out Agreement with a Farmor, Farmee will acquire a license to mine Tenements.
2. Risk: There is no guarantee that Government-issued Tenancies 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 where exploration work has already been carried out.
3. Income: In consideration for the work performed by Farmee, Farmor will generally share with Farmee a percentage of the return received from the exploitation of the Tenements.

Disadvantages:

1. Capital Requirements: Farmee must be able to pay the consideration price to Farmor in accordance with the agreement (if any) and also meet its obligations to perform the works on the Tenements. This may require significant capital as it is often the case that Farmor has a stronger bargaining position as it is licensed by the Tenements.
2. Strict contractual obligations: Farmee will generally be bound by strict obligations to Farmor for the exploitation of the Tenements.

Key Considerations:

We recommend that you carefully consider the following 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 agreement; and
4. Whether there are sufficient benefits to 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.