Mining royalties in an insolvency: where we think the legal position will land
Cameron Belyea, Cayli Bloch, Stuart MacGregor, Tristan Appleby and Armin Fazely
Time to read: 9 minutes
The legal treatment of private mining royalties in insolvency remains unsettled and is subject to ongoing judicial scrutiny in Australia, but proper structuring and security can influence the enforceability of royalty rights during corporate distress.
Royalty holders' rights in an insolvency context in Australia have become a topic of increasing interest to insolvency practitioners, secured parties looking to enforce their security interests and/or undertake a debt for equity swap, and independent third party investors looking to invest in the Australian mining market.
The law however remains subject to ongoing testing by the Australian Courts. In this article, we'll set out the various uses of royalties, the most arguable position and where we think the law currently sits and will land in the treatment of these rights.
Mining royalties in Australia – how they're used and calculated
A private mining royalty is a contractual right to receive payments from a mining company based on the extraction or sale of minerals. These rights are separate and distinct from statutory royalties, which are government-imposed charges for extracting state-owned minerals and function more like taxes.
Traditionally, private royalties were used in project acquisitions, acting as a finder’s fee, or as deferred consideration in mergers and acquisitions. They also appear in joint venture agreements – particularly where a party converts an equity stake into a royalty – and in native title and access agreements with traditional landowners.
In recent years, royalties have evolved into a tool for project financing. These arrangements allow miners to raise upfront capital without immediate repayment obligations or equity dilution.
Royalty financing involves an upfront payment to the miner in exchange for a contractual right to receive payments based on mineral production, sales or profit or revenue. This arrangement is attractive to mining companies because:
it is non-dilutive to equity;
typically, no repayments are required unless and until production commences; and
royalty payments scale with actual production, profit or revenue.
Prepaid offtake arrangements – where a purchaser pays in advance for future production, typically at a discount.
Metal streaming agreements – where a financier provides upfront funding in exchange for the right to acquire a portion of future production at fixed or discounted prices.
Each of these arrangements allow miners to raise funds without taking on conventional debt or diluting equity. While they share some similarities, the legal structures, risks, and economic outcomes for the parties involved are distinct.
Private mining royalties may take several forms, depending on how the payment is calculated:
Net Smelter Return (NSR) Royalty: based on the gross sales price of minerals, less agreed deductions (eg. transport, smelting, refining). NSRs are highly negotiable and depend on clear definition of allowable deductions.
Net Profit Royalty: calculated as a percentage of profit after deducting all operational, capital, and financing costs. This is less favourable to royalty holders but attractive to miners as payment is tied to actual profitability.
Gross Revenue Royalty: a fixed percentage of the gross proceeds from mineral sales, with no deductions. Simple to calculate and highly favourable to the royalty holder.
Volume or Tonnage Royalty: payments are based on a fixed amount per tonne of minerals produced or sold. Like gross revenue royalties, this structure is straightforward and transparent.
Each royalty type balances complexity and risk differently, impacting both the royalty payer and holder. For miners, these arrangements can be attractive due to flexibility and lower operational restrictions. For financiers, however, legal protections are critical. Agreements often include warranties, reporting obligations, caveat rights, and security interests over tenements or company shares.
Our view on the position of royalties in an insolvency context (with a specific focus on voluntary administration)
If the mining project is successful, then you would hope the royalty distribution would be fairly uncontroversial, based on the underlying contractual arrangement. But what if it is not?
Much turns on the characterisation of the right and whether it can be extinguished by a deed of company arrangement (DOCA). While some of the legal concepts are still subject to ongoing review by the Australian Courts, given our practical experience in this area we are confident that this summary remains the most arguable legal position.
Mining Royalties flowchart
We outline below how these legal principles play out in some recent worked examples and matters we have been involved in.
Acting for the administrators of a joint venture mining company
We act for the administrators of a joint venturing mining company. The company's largest secured creditor proposed a deed of company arrangement in relation to the company; the terms of which are essentially a debt for equity swap, plus an amount available for unsecured creditor payments, including unsecured royalty holders, to allow for the ongoing operation of the mine, continued employment of all staff and the continued engagement of numerous contractors.
Minerals produced at the mine were the subject of four royalty agreements, three of which the administrators characterised as contractual only (and thus capable of extinguishment under a DOCA), for the reasons outlined below (and with reference to the legal principles summarised above).
Characterisation of the royalty right: legal proprietary or equitable proprietary vs contractual
Understanding what the royalty right actually is requires a three step analysis.
Step 1: Is the royalty right legal proprietary in nature?
The first royalty agreement was held by the largest secured creditor (and DOCA proponent), who had an express right to lodge a mortgage over the tenements, and an express right to lodge caveats in relation to the tenements (and did so). The largest secured creditor (through the security trustee) was also provided with an attendant registrable security interest, that is, the express ability to lodge a Personal Property Securities Register (PPSR) registration against the company's assets (other than the tenements) to protect its royalty rights (and did so). Following the flowchart, the secured creditor's royalty rights are clearly legal propriety in nature and thus cannot be extinguished under a DOCA.
The three other royalty agreements were held by a foreign entity, an Australian proprietary company and an individual. None of these royalty agreements provided the royalty holders with the right to lodge a mortgage in relation to the tenements. Notably, the foreign entity was provided with an attendant registerable security interest. It could lodge a PPSR registration against the company's other assets to protect its royalty rights, although it did not register (perfect) the interest, so the interest vested in the company immediately prior to the appointment of the administrators. Neither the Australian proprietary company nor the individual had a similar attendant registerable security interest under their royalty agreement.
Step 2: is it an equitable proprietary interest?
If a security or legal proprietary interest is not created under the agreements, the next question to consider is whether an equitable proprietary interest is created. For the three other royalty holders to successfully claim an equitable lien or vendor's lien over the tenements:
the royalty payments payable to each of them under their respective royalty agreements would need to form part of the purchase price for the sale of the tenements; and
there must be mining and mineral extraction currently being conducted.
This principle has been tested by case law, which has teased out some of the difficulties that arise when trying to claim an equitable lien over a tenement or its proceeds.
First, even if the royalty is included as a part of the purchase price, the moneys under the royalty may not actually be due. Instead, they may be contingent obligations. For the actual royalty liability to arise it may be necessary for a number of conditions to be fulfilled, for example, the extraction and recovery of minerals. This is to be contrasted with the more usual situation of unpaid instalments of purchase price which are sums certain and falling due at specific future dates.
Secondly, there have been cases where the contingent nature of the future right to the royalty in question (5% of the net profit from future production), which formed part of the consideration for the sale of a mining tenement, prevented it from being categorised as a proprietary interest.
More recently, Warden Maughan in ARM Mining Pty Ltd v SKR New Investment Pty Ltd [2023] WAWC 1 attempted to redefine or expand the parameters (although not-binding), of the equitable proprietary interest test:
It follows for a vendor's lien to be established the following 3 matters must be identified for the existence of any equitable lien to be established…:
that there be an actual potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or an expense incurred in relation to it;
that property be specifically identified and appropriate to the performance of the contract; and
a relationship between the actual and potential indebtedness and the identified and appropriate property be such that the owner would be acting unconscientiously or unfairly if he would dispose of the property to a stranger without the consent of the other party or without the actual or potential liability having been discharged."
The royalties payable to each of the other three royalty holders under the respective royalty agreements fell short of this characterisation, because:
the royalty payable to the foreign entity formed part of the consideration for the sale of the foreign entity's shareholding in the company to a third party (and was not a royalty payable as part of the purchase price for the tenements themselves); and
the royalty payable to each of the Australian proprietary company and the individual formed part of the purchase price for the mining information (and not the tenements themselves).
Given the first limb was not satisfied, the question of whether minerals were currently being extracted did not need to be considered.
Step 3: is it just a contractual right?
If the right cannot be characterised as legal proprietary or equitable proprietary in nature, the right is considered to be contractual only. While the other three royalty holders were granted the right to lodge caveats under the respective royalty agreements, the right to lodge (or the lodgement) of the caveat, does not itself create a proprietary interest in the underlying tenements and its proceeds. Notably, the foreign entity did not even lodge caveats against the tenements (although even if caveats had been lodged, this would not have afforded the foreign entity with a proprietary interest in the tenements).
Case law clearly indicates that if a royalty right is not considered to be proprietary in nature, a caveatable interest does not arise. A caveat can only seek to protect an individual’s proprietary rights in a tenement.
Section 122A(2) of the Mining Act 1978 (WA) however now arguably allows a party to lodge a caveat (known as a consent caveat, as the parties have agreed to the lodgement) against a mining tenement in relation to a contractual royalty right. While the breadth of the phrase “any other matter connected with the holder’s interest in the mining tenement” in section 122A(2) is yet to be tested, we understand the Department of Energy, Mines, Industry Regulation and Safety (WA) will permit the lodging of a caveat to protect a royalty, thus overcoming the commonly held view that a caveat cannot be lodged in respect of a personal right. That said, a caveat will be of little assistance in protecting a royalty holder’s rights to any unclaimed contractual (personal) royalty entitlements.
If (as this suggests) a proprietary interest is not required for the purposes of a section 122A(2) caveat, does that mean the caveat will withstand challenge? We would say no; facing a caveat without a proprietary interest, a Mining Warden may well order the removal of the caveat, after consideration as to whether there is a sustainable caveatable interest.
With the above in mind, the rights afforded to each of the other three royalty holders are only considered to be contractual in nature.
Whether the royalty right can be extinguished under a DOCA
The final question to consider once the nature of the royalty has been established, is whether the royalty right can be extinguished under a DOCA. If the right is considered to be contractual only, it can be extinguished under a DOCA (unless expressly preserved). This means the other three royalty holders must only claim as unsecured creditors in the administration of the company, and in accordance with the terms of the DOCA. Notably, a DOCA cannot extinguish proprietary rights.
Potential acquisition of ASX listed mining group
We have recently acted for an independent third party investor looking to put forward a DOCA in relation to the potential acquisition of an ASX listed mining group (Administrators Appointed), which required consideration of certain royalty arrangements. Due to the confidential nature of this transaction, any identifiable information has been omitted.
Terms of the royalty agreement
The royalty payer (owner of the tenements), royalty holder and royalty payer parent company (as guarantor), entered into a sale agreement, under which (among other key terms):
The royalty holder agreed to sell the tenements and the relevant records to the royalty payer for consideration of an Australian dollar value amount;
The parties agreed to enter into a separate Royalty Deed and a Mining Tenement Mortgage, prior to completion of the sale under the sale agreement.
A couple of months later (and prior to completion of the sale under the sale agreement), the royalty payer (owner of the tenements), royalty holder and royalty payer parent company (as guarantor) entered into two further documents, the Royalty Deed and the Mining Tenement Mortgage.
Under the Royalty Deed:
The royalty payer agreed to pay the royalty to the royalty holder, in respect of all minerals sold, used or otherwise disposed of during a relevant period;
The royalty holder was provided with the right to lodge a caveat over the tenements as a form of "security". Despite this, no caveat was lodged by the royalty holder;
The royalty payer is not entitled to encumber the tenements without the royalty holder's prior written consent, and entry by all relevant parties into a deed of priority (under which the royalty holder is to be granted priority);
The royalty holder was granted a call option to request the transfer of the tenements to itself, if a breach event occurs (that is, if any material term of the Royalty Deed is breached, for example, not seeking the royalty holder's consent to an assignment or transfer of a tenement, non-payment of a royalty). This call option right was secured by the Mining Tenement Mortgage, and subsequent lodgement of the mortgage over the tenements (discussed further below).
Under the second document, the Mining Tenement Mortgage:
The royalty holder was granted the right to register a mortgage over the tenements, as security for payment of the royalty obligations. A recent tenement search confirms that a mortgage was granted in favour of the royalty holder.
The mortgage ranks in priority ahead of all other security interests over the tenements.
The royalty holder has the right to appoint a receiver and/or take possession of the tenements if an event of default subsists (which includes appointment of administrators, failure to make the royalty payments under the Royalty Deed, and/or failing to transfer the tenements if the call option is exercised).
Characterisation of the royalty holder's royalty right
The royalty holder's royalty right granted under the Royalty Deed is protected by a concurrent security interest, that is, the mortgage registered against the tenements (granted under the Mining Tenement Mortgage). By reason of this mortgage, there is an argument that the royalty holder's royalty right is legal proprietary in nature. On that fact pattern (though there are others not discussed here), the royalty holder's consent potentially must be obtained for any sale of the tenements and discharge of the royalty holder's mortgage.
If the factual material was limited to the above matters, the royalty holder would not have been able to claim a vendor's lien in relation to the tenements, as the royalty payments did not form part of the purchase price for the tenements. The consideration for the purchase of the tenements was a dollar value amount only. It is also important to note that the "non-encumbrance" clause included in the Royalty Deed would not of itself have created a security interest or a proprietary interest in the tenements.
Key takeaways
Mining royalty holders must carefully consider the legal standing of their rights, particularly given the ongoing testing by the Australian Courts. In turn, miners should be aware that royalty agreements, while useful for financing and acquisition, can complicate future restructuring or refinancing efforts.
At the front end, a royalty holder should pay close attention to contractual protections and definitions within the royalty deed, and use clear structuring to distinguish between contractual rights and proprietary claims. Intercreditor agreements are often required when royalty or streaming financings coexist with other debt facilities to ensure priority of payments and enforceability.
Mining royalty holders should seek to secure their rights by an express entitlement to lodge a mortgage over the tenements, or a right to lodge a PPSR security interest in relation to the royalty holders' other assets. If neither of these two options are available, the royalty holder should or at least seek for its rights to be expressly preserved under the terms of any DOCA (noting all such protections are difficult to achieve if the royalty holder is not also a funding party).
This is because a royalty right is generally in personam and capable of extinguishment under a DOCA, unless:
The royalty is expressed/necessarily is a legal proprietary right in relation to the tenements themselves (and is mortgage protected); and/or the royalty holder is granted a PPSR protection as against the other assets of the royalty payer; or
The royalty is an unpaid vendor's lien.
Get in touch with the authors
Cayli Bloch
Senior Associate •
Sydney
+61 8 9426 8022
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.