Financial Post | 11 April 2016
Canadian miners face uphill battle to collect on arbitration wins
by Peter Koven
Crystallex International Corp. completed the easy part last week: It won an arbitration award against Venezuela worth nearly US$1.4 billion.
Now comes the hard part: actually collecting that money.
Over the past couple of years, Canadian mining companies have won several international arbitration cases against governments in developing countries that expropriated their properties. A key lesson from these cases is that if governments refuse to recognize these awards, compelling them to do so is very difficult. The easier thing to do is settle for pennies on the dollar or reach a non-cash settlement.
In the case of Venezuela, the collection problems are compounded by the country’s massive economic crisis. Venezuela simply can’t afford to shell out US$1.4 billion to an insolvent Canadian firm that isn’t adding a penny of value to its economy.
So Toronto-based Crystallex may have no choice but to try to enforce the award. Experts who have been through this process said the company could be in for a very rough ride.
“When you start the case, you’re not looking at the collection end,” said Grant Edey, chief executive of Khan Resources Inc., which recently settled an arbitration fight with Mongolia.
“But the collection end is very difficult, especially with third-world countries.”
When governments refuse to pay arbitration awards, companies can try to seize state-owned assets located outside the country. With the exception of military and diplomatic assets (such as consulates), anything is potentially up for grabs.
The asset seizure process itself is a form of punishment for developing countries, making it difficult for them to access international debt markets or attract foreign investment. So it encourages countries to settle.
“You rarely find a case of a seizure happening. Often seizure proceedings get started and get resolved by some form of settlement,” said Robert Wisner, co-head of the international arbitration practice at McMillan LLP.
There are isolated cases where these seizures have actually gone ahead. Hedge fund Elliott Asset Management, which was engaged in a long debt battle against Argentina, famously seized a training ship in West Africa that was owned by Argentina’s navy. Elliott held the ship for more than two months in 2012 before a court-ordered release.
But asset seizure is an extremely difficult process. Just finding an asset to take and proving it belongs to the government can take years. For example, seizing Venezuelan oil exports may seem like an obvious option for Crystallex, but the state-owned company exporting the oil could argue that it is distinct from the government, which is simply its shareholder.
Once assets are identified for seizure, getting a court order to claim them takes more time, especially when the country is fighting every step of the way.
Khan won a US$100-million award against Mongolia, which the government refused to pay. The company realized that Mongolia had U.S. dollar bonds and it could potentially seize the interest. But there were a lot of legal roadblocks in the way, and resolving them would take a long time.
“You can drag it out for five years with good lawyers,” Edey said.
Last month, Mongolia finally offered Khan US$70 million to put the matter to rest. Rather than wait years and rack up big legal fees trying to get the US$100 million, Khan took 70 cents on the dollar today.
At least Mongolia was willing to negotiate after the asset seizure process began. Some governments refuse even that.
Canadian firm Stans Energy Corp. is one of several companies that have been trying to enforce claims against Kyrgyzstan, which refuses to recognize the awards. The companies are targeting Kyrgyzstan’s shares of Canadian miner Centerra Gold Inc. in lieu of payment. But after Russian courts set aside Stans’ US$118-million arbitration award, an Ontario court effectively blocked the company’s effort to claim the Centerra shares.
Now Stans has to convince the Ontario Court of Justice that it was treated unfairly in Russia and the arbitration award still stands. It is uncertain whether this strategy will work, but it is certain to be costly and time-consuming.
“Our lawyers are paid, our lights are on and we continue to fight,” said David Vinokurov, head of corporate development at Stans Energy.
If Crystallex doesn’t want to spend the next few years in court trying to identify and seize assets, it could try to reach a quick settlement with Venezuela. That is precisely what fellow Canadian firm Gold Reserve Inc. just did.
Gold Reserve, which won a US$740 million arbitration decision against Venezuela last year, struck a joint venture with the government to develop a massive gold project. It would include the projects that the Venezuelan government expropriated from both Gold Reserve and Crystallex, which lie next to each other.
This settlement is full of question marks (particularly around financing) and has not been finalized. But experts said there might be an opportunity for Crystallex to get in on the agreement as well. It would certainly be an easier sell for the reeling Venezuelan government than demanding US$1.4 billion in cash.
“Crystallex’s gold reserves are very valuable,” Edey said. “If you could entice someone like Barrick (Gold Corp.) to do a three-way deal and get the project into production somehow, you could probably settle.”