Originally published in Latin Lawyer.
1. Provide an overview of the mining industry in your country. What significance does the mining industry have as a component of the national economy?
The mining industry has progressively gained an important role in the Colombian economy in the past decade thanks to government policies which have favoured foreign investment and promoted mining exploration and exploitation. The permanent control by the government of areas, which in the past were difficult to access, due to public order issues has favoured the exploration of vast territories and the improvement of mining in other areas which historically were being mined in Colombia.
Thermal and coking coal, nickel and emeralds have been the traditional Colombian mining products. Gold, silver and iron ore exploitations have been gaining strength and have presented a constant growth during the past years.
Although mining activities do not represent a large portion of the GDP (1.54 per cent average for the period between 2003 and 2008 according to the National Department of Statistics (DANE)), the mining industry in Colombia has been, during the last decade, one of the main recipients of direct foreign investment (an average of 21.24 per cent of the direct foreign investment in Colombia was directed to the mining industry between 2003 and 2008), a figure that acquires a special significance in a country like Colombia, which has focused a great part of its development strategies in the mining industry.
Additionally, between 2004 and 2008, the mining industry represented an average of 20.48 per cent of Colombia's exports, a percentage that, according to official economic forecasts, will probably grow in the future thanks to important investments in mining exploration projects made in recent years. Gold exports have now surpassed coffee in order of importance.
In the past decade, Colombian mining and petroleum industries have doubled their exports; in the first trimester alone of 2010 this sector grew 13.2 percent.
Furthermore, the Colombian Stock Exchange Market has been attracting several mining and petroleum companies looking to develop ambitious projects in Colombia. Companies like Pacific Rubiales have experienced the benefits of the Colombian market while several other companies like Greystar, Canacol and Medoro have expressed their interest to be a part of the local stock market. It is foreseeable that the mining industry could be the fastest growing industry in Colombia during the next decade as the projects currently in exploration reach more mature stages and major players start consolidating their interests and positions in Colombia.
2. Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?
The legislative branch, and specifically Congress, is the single competent authority in Colombia to enact laws. Furthermore, the executive branch may issue the necessary regulations, directives and guidelines to ensure that the laws issued by Congress may be effectively applied. The regulatory powers of the executive branch are limited by the scope of the laws and must not modify or exceed the terms, conditions and general principles established therein.
Since 1940 the Mines and Energy Ministry (formerly the Mines and Petroleum Ministry) has been the main mining authority with the legal capacity to regulate mining activities in accordance with the laws issued by Congress.
The Mines and Energy Ministry delegated several of its mining-related powers to national and departmental authorities as follows:
- The National Institute of Geology and Mining (INGEOMINAS) is the national delegate mining authority in relation to royalties, promotion of the mining industry and management of the mining cadastre. In addition, INGEOMINAS is the entity entitled to grant and control the performance of concession agreements in the departments where no other authority has been appointed for that purpose;
- some regional governments have been granted the capacity to grant and control the performance of concession agreements. Such authorities and their capacities in relation to mining issues are described below;
- the governments of the departments of Antioquia and Bolivar were designated to manage all the minerals within their respective territory; and
- the governments of the departments of Caldas, Cesar, Norte de Santander and Boyaca manage all the minerals found within their respective territories, except for coal and emeralds which is managed by INGEOMINAS.
In general terms, all of the delegate authorities mentioned above must follow national laws issued by Congress and have to comply with the regulations issued by the Mines and Energy Ministry.
3. Describe the investment regime applicable to foreign company involvement in mining projects.
Under Colombian law, foreign individuals and corporations which act as mining concessionaires have the same rights as Colombian individuals and corporations, and Colombian governmental regulatory bodies are specifically prohibited from requiring any additional or different requirements. Foreign companies, however, will have to constitute a branch, subsidiary or affiliate in Colombia before they may be granted a concession agreement.
In general terms, companies that perform sales in foreign currency will have to repatriate such amounts in Colombian pesos through the authorised foreign exchange intermediaries. The branches of foreign companies, however, that perform activities of exploration and exploitation of petroleum, natural gas, coal, ferronickel or uranium; or services related to the hydrocarbon sector (as determined by article 16 of law 9 of 1991 and Decree 2058 of 1991) are exempted from this repatriation obligation. These branches may not acquire foreign currency in the foreign currency exchange market and will have to repatriate the amounts necessary to pay any expenses in local currency. Notwithstanding the foregoing, these branches may, prior to certification from the fiscal auditor of the branch, use the foreign exchange market to send abroad the equivalent in foreign currency of the amounts received in Colombian pesos for internal sales of services; and the capital of the branch in the event it is liquidated.
Dividends are payable to foreign investors as they would be payable to any local investor. No prior authorisation is required for the remittance of dividends abroad so long as they are adequately supported by the relevant financial statements. The foreign currency will be negotiated with the relevant foreign intermediary and remitted abroad through the filing of certain forms before the Colombian Central Bank.
4. Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?
Colombia is a party to several international investment treaties which may, in general terms, apply to mining projects undertaken by foreign companies in Colombia. By means of these treaties (which include free trade agreements (FTA) and agreements for the reciprocal protection and promotion of investments) Colombia intends to attract foreign investments, granting the investors a stable legal environment and guaranteeing that foreign investors will receive national and most favoured nation treatment.
As a general rule, these treaties do not require a contractual or direct relation between the investor and the government to benefit from the terms established therein and establish that any conflicts or disputes between an investor from one party and the other party should be settled according to the mechanisms established in the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States done at Washington, 18 March 1965.
The aforementioned international investments treaties that are currently in force in Colombia are:
- chapter XVII of the FTA between Colombia and Mexico that entered in to force in 1995;
- agreement for the reciprocal protection of investments between Colombia and Peru that entered into force in 2003;
- agreement for the reciprocal protection of investments between Colombia and Spain that entered into force in 2007;
- chapter IX of the FTA between Colombia and Chile that entered into force in 2009;
- agreement for the reciprocal protection of investments between Colombia and Switzerland that entered into force in 2009;
- chapter XII of the FTA between Colombia, Guatemala, Salvador and Honduras that entered in to force between 2009 and 2010; and
- FTA between Canada and Colombia, which has been signed but is pending approval by Congress.
5. What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?
Mining regulations in Colombia follow the principle that (except for limited exceptions) all mineral deposits are property of the state and therefore may only be exploited with the permission of the relevant mining authority which, as described before, may be INGEOMINAS or the regional governments designated by law.
According to Colombian regulations, any person and public or private entity which expressly includes in its object mining exploration and exploitation may apply for a mining title. Notwithstanding the foregoing, territorial entities (ie, municipal or regional governments), companies or contractors which intend to construct, repair, maintain or improve a national, departmental or municipal public road or to develop a mayor infrastructure project declared of national interest by the government will be able to, subject to the environmental regulation, request before the mining authorities a temporary authorisation to extract from neighboring rural properties to the working site, the necessary construction materials to perform the mentioned activities.
Under Decree 2655 of 1988, the rights to explore and exploit national mining reserves were granted through four mechanisms:
This authorisation granted the holder the right to explore a determined area for a limited term determined by the size of the requested area. Once the term of the exploration licence lapsed and if the title holder had complied with all its obligations, it had the right to request the corresponding exploitation licence (if the exploitation project was considered small) or concession agreement (for medium or large mining projects).
Once the area had been explored in accordance with the exploration licence and if as a result the mining project was classified as a small mining project, the title holder was entitled to request an exploitation licence. This title permitted the exploitation of the area for an initial term of 10 years. Two months before the initial term had lapsed the title holder was entitled to request the extension of the exploitation licence for 10 years or apply for a concession agreement.
This title granted the title holder the exclusive right to extract the corresponding minerals and to conduct the necessary efforts to explore, exploit, process, transport and ship the relevant minerals. These titles had a 30-year term.
The Ministry of Mines and Energy granted its related entities having as part of their purpose the development of mining activities, the exclusive and temporary right to explore and exploit the deposits located in a determined area. The entities that were granted this right were entitled by law to subcontract the mining activities with any third party.
In 2001, Congress issued Law 685 (the Mining Code). This law established that, from that date, the rights to explore and exploit mining reserves would only be granted through a single mining concession agreement (the 2001 Concession Agreement). This new form of contracting did not affect the pre-existing mining titles (licences, aportes and concessions) which continue to be in force until their term lapses.
The 2001 Concession Agreement includes the exploration, construction, exploitation and mine closure phases and are granted for periods of up to 30 years. This term may be extended upon request by the title holder for an additional 30-year term. According to the Mining Code, the initial term was divided into three different phases:
During the first three years of the concession agreement, the title holder will have to perform the technical exploration of the concession area, this term may be extended for two additional years upon request from the title holder.
Once the exploration term lapses the title holder may begin the construction of the necessary infrastructure to perform exploitation and related activities. This phase has an initial three year term which may be extended for one additional year.
During the remainder of the initial term minus the two previous phases, the title holder will be entitled to perform exploitation activities.
Law 1382 which was issued by Congress on 9 February 2010 (Law 1382), modified different articles of the Mining Code and established that the new concession agreements that were granted after 9 February 2010, would have the same initial term (30 years) but would only be subject to an extension of up to 20 years provided that it is evidenced that the extension benefits national interests. Additionally Law 1382 established that the exploration phase may now be extended for a total of 11 years, granting the title holders up to six years more to perform exploration activities.
With respect to the minerals included in a mining title, it is important to note that mining rights are usually granted for specific minerals within the concession area; however if the title holder finds other minerals within the granted area, it may request the mining authorities to extend the object of the agreement to include them.
In relation to the environmental requirements, Colombian laws have distinguished between the environmental requirements for exploration activities, and those that have to be fulfilled for construction and exploitation works. During the exploration phase, the title holder does not require a specific environmental permit or licence (unless it plans to use natural resources during this phase, case in which the respective permit will have to be obtained with the relevant environmental authority); however, it will have to comply with the mining and environmental guides issued by the Mines and Energy Ministry and the Environmental Ministry.
In order to begin and perform construction and exploitation operations, the title holder must obtain an environmental licence. Environmental licences may include all the necessary permits, authorisations and concessions for the use of natural renewable resources in the development or operation of the mining project, construction or activity.
In order to obtain an environmental licence, the applicant must file an environmental impact assessment which includes amongst others; a description of the project, the natural renewable resources to be used and a report of the possible environmental impacts and the measures that are going to be taken to prevent, mitigate, correct or compensate them. Depending on the size of the mining project, the relevant authority to issue the environmental licence may be the Environmental Ministry or the Regional Environmental Authority (CAR).
6. What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuing a mining concession? What remedial actions are available to the granting authority when such levies are unpaid? What cure rights and cure periods are permitted with respect to such amounts? May a creditor step in and cure in lieu of the mining company
There are different government fees and royalties payable by mining titleholders. During the exploration and construction phases, the holder of a concession agreement must pay a surface fee. For concession agreements granted before 9 February 2010 the surface fee is equivalent to one Colombian minimum daily wage (approximately US$8.50) per hectare per year for areas up to 2,000 hectares, two minimum daily wages per hectare per year for areas of 2,000 to 5,000 hectares, and three minimum daily wages per hectare per year for areas between 5,000 and 10,000 hectares. Concession agreements granted after the enactment of Law 1382 will have to pay a surface fee equivalent to one Colombian minimum daily wage per hectare per year for the first five years of exploration. Thereafter the surface fee for exploration shall increase every two years of exploration in 0.25 minimum daily wages per hectare per year. For the construction phase, the title holder will have to pay a surface fee at the same rate that it paid during the last year of exploration.
During exploitation, the title holder will have to pay a royalty equivalent to a determined percentage of the value of the production at the mine pit depending on the extracted mineral as follows:
- Coal (exploitation of more than 3 million tons/year): 10 per cent
- Coal (exploitation of less than 3 million tons/year): 5 per cent
- Nickel: 12 per cent
- Iron and copper: 5 per cent
- Gold and silver: 4 per cent
- Alluvial gold: 6 per cent
- Platinum: 5 per cent
- Salt: 12 per cent
- Limestone, gypsum, gravel and clay. 1 per cent
- Radioactive minerals:10 per cent
- Metallic minerals: 5 per cent
- Non metallic minerals: 3 per cent
- Construction materials: 1 per cent
Law 141 of 1994 established that exploitation royalties may be paid in local currency or in kind as determined by the Mines and Energy Ministry. In practice, royalties are paid in local currency by the mining companies.
7. What in general terms is the water rights regime? What is the availability of water for mining facilities? What techniques or activity have you seen in your jurisdiction to address limited or shared water resources?
The water supplies for the mining concession projects in Colombia are obtained from natural water sources located nearby the mining areas. For the legal use of the hydro natural resources permits must be obtained from the relevant authorities.
In general terms, water rights may be granted to individuals or entities by law, permits or concessions. In relation to mining activities, water rights are granted by means of a water concession which is granted by the environmental authorities and which is independent to the mining concession or to land ownership.
As described before, water concessions may be included in the environmental licence which the mining projects must obtain before performing construction or exploitation works, or may be requested independently for a specific use. Generally, the water rights related to mining activities are included in the environmental licences which are granted for the duration of the mining projects.
The terms and conditions under which a water concession is granted may depend on the amount of water available in the specific region, the possible environmental impact of the concession and the different users that the water source services.
The water concessionaire is by law obliged to:
- use water efficiently in the permitted location and for the intended purposes;
- use only the permitted amounts;
- build appropriate water facilities;
- contribute proportionately to the conservation of hydraulic structures, roads, law enforcement and other works and common facilities;
- avoid any damages to water resources; and
- avoid the contamination of the water necessary for public supply or for agricultural or industrial purposes.
Failing to comply with the aforementioned obligations may result in the cancellation of the water concession.
8. What in general terms is the surface rights regime?
Mining titles do not grant their holder any surface rights. However, provided that mining has been declared a public interest activity, if the title holder does not reach an agreement with the surface right owner, it may request the Mayor of the municipality where the property is located to impose a mining easement over the affected property. Mining easements may be established for the efficient exercise of the mining industry in all its phases and stages including transport and transformation and may extend to areas outside of the mining title. Mining easements are, unless otherwise determined by the parties, established for the same term as the concession it benefits.
Expropriation may also be requested by the title holder over the properties that may be indispensable for the development of the mining project. The mining expropriations may be requested before the mining authorities who will perform an evaluation to verify that the property to be expropriated is necessary to establish and operate the mining project and to determine the value of the compensation that must be paid to the surface rights owners.
As concerns transportation, operators must make all efforts to accommodate third parties in need of such transportation provided the relevant feasibility studies confirm the need to expand the relevant transportation method.
9. What is the availability of power for remote mining facilities? May mining facilities generate their own power?
The national power grid covers an estimate of almost 90 per cent of the national territory which means that most mining facilities will probably have access to electric power services. However if for any reason the mining project requires or wishes to generate its own electricity, national electric regulations allow all economic agents to own and operate their own power generation facilities, provided that they comply with all the environmental requirements (environmental licence for power generation plants of 10MW or more, and the specific environmental permits, authorisations and/or concessions that may be required for plants of less than 10MW).
10. What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power rights? What remedies are available to the concessionaire if rights are wrongfully terminated?
In general terms, mining concession will be terminated upon expiration of its term; if the title holder resigns the concession; if the parties to the agreement mutually agree on its termination; upon death of the concessionaire provided that within the two years following the decease the legatees do not request the mining authorities to be assigned the rights under the mining concession. Additionally, the mining authorities may declare the cancellation (caducidad) of the agreement if the title holder:
- is dissolved;
- falls into financial incapacity that hinders the performance of the agreement which may be presumed if the title holder enters into a liquidation (bankruptcy) procedure;
- fails to carry out the works within the terms set forth in the agreement or suspends the performance of the agreement for more than six months without authorisation;
- fails to make timely payments of the royalties and economic rights provided under the agreement;
- fails to request authorisation from the mining authorities before it assigns its rights under the agreement;
- fails to make timely payment of all fines;
- is in material and reiterated breach of technical regulation regarding exploration, exploitation, hygiene, safety; or the competent authority revokes any environmental authorisation needed to perform the agreement;
- is in breach of any statute regarding areas where mining is excluded or restricted;
- is in material and reiterated breach of any of its obligations under the agreement;
- declares that the origin of the mineral is other than its true and correct origin, and as a result economic compensations are paid to a municipality other than that where the mineral was extracted; or
- hires personnel of under 18 years of age to perform mining activities.
Technical disputes that arise between the concessionaires and the mining authorities which are not solved directly by the parties will be finally settled by a technical arbitration panel. Legal and economic disputes will be subject to Colombian courts. If there is no agreement as to the nature of a dispute, it will be deemed to be legal.
Environmental licences may be suspended or revoked by the relevant environmental authority if the licence holder fails to comply with any of the terms, obligations or conditions under the licence, set forth in law, regulation or in the resolution that granted the licence. The termination or suspension will have to be duly reasoned by the environmental authorities based on a technical concept issued by an officer of that entity and will be subject to legal remedies.
11. Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.
The regulatory regime and governmental policies have sought to increase investments in infrastructure projects. The fact the Colombian laws establish that infrastructure projects are of public and national interest means that tools such as expropriation and easements may be used for their development. Generally speaking, the applicable regulations and laws as well as recent national policies, have conducted to the installation and provision of essential infrastructure in Colombia.
12. Please provide a description of the collateral security arrangements permitted in your jurisdiction, relating particularly to the mining project's ability to grant to creditors a perfected security interest in concession rights, water rights, surface rights, related easements, permits, licences, land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?
Mining regulations allow the establishment of pledges over the rights to explore and exploit a mining title in order to secure credits or other obligations assumed by the title holder to obtain the funds to develop the mining project. Additionally the title holder may constitute pledges over the mining establishment and on the exploited minerals.
In relation to the surface rights, the land owner may grant creditors a mortgage over the real estate property to secure any type of credit or obligation.
13. I s it accepted practice for creditors financing a mining project to enter into an agreement with the mining authority in connection with the creation, perfection or acknowledgement of the collateral security interests granted to the creditors in mining projects, including to facilitate the transfer of such rights to a successor owner/operator? Is there any requirement, benefit or limitation to such agreements?
Such practice is not allowed by Colombian law. The only security available is the pledge mechanism described above.
Mining pledges do not require the previous authorisation from the mining authority; however, they must be registered with the National Mining Registry.
14. What means of enforcement are available to creditors in connection with collateral security interests in mining rights?
Mining pledges may be foreclosed by the creditor requesting the attachment of the rights to explore and exploit the mining title and requesting the seizure of the infrastructure and equipment of the mine. At the end of the day, the judge will sell the relevant assets in a public auction and will pay the creditors with the proceeds of the auction.
In order to foreclose the pledge effective, the creditor may also request that the judge appoints a manager to continue the exploitation of the pledged title and that the revenues obtained from such activity are used to pay the amounts owed by the title holder to the creditor.
15. What insurance must be placed with domestic insurance companies? Can insurance be placed abroad? Can claims be paid directly offshore? Are there restrictions with respect to obtaining reinsurance outside the country, and obtaining assignments or cut-through endorsements to permit claims to be made directly to owners or creditors outside the jurisdiction?
Under law 685 of 2001, the title holder must furnish a mining and environmental insurance policy. During the exploration phase, the insured amount must be of 5 per cent of the value of the planned annual exploration expenditures. For the construction phase, the insured value must be of 5 per cent of the planned investment for assembly and construction. During the exploitation phase the insurance policy will have to cover 10 per cent of the result of multiplying the estimated annual production by the mine pit price of the extracted mineral, as established by the Colombian government.
Law 1382 included the possibility to substitute the mining insurance policy with a real security provided that such security fully guarantees the fulfilment of the mining and environmental obligations, the payment of fines and the cancellation of the concession agreement. Such insurance must be obtained with local insurers.
16. Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.
Domestic personnel of a mining company must represent at least seventy percent of the total payroll of qualified or management personnel, and no less than eighty percent of the payroll of the subordinate employees. Notwithstanding the foregoing the Ministry of Social Protection may authorise mining companies to hire a larger percentage of foreign employees, for a limited time, to allow specialised training for domestic personnel.
17. Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?
Depending on the business vehicle used to establish the company in Colombia, the liabilities for their shareholders, owners or partners (as applicable) for tax and labour matters differ as follows:
SIMPLIFIED STOCK CORPORATION (SAS)
Unless the corporate entity or veil is disregarded the shareholder(s) will not be liable for the tax, labour or any other liability of the corporation. The corporate entity or veil is disregarded when the corporation is used as a fraud to the law or in detriment of third parties. Shareholder(s) as well as the administrators involved in the fraud are jointly liable for the obligations derived from such fraud and for any damages caused.
STOCK CORPORATION (SA)
The shareholders are liable up to the amount of their capital contributions.
LIMITED LIABILITY COMPANY (LTDA)
Partners are jointly liable for the company's tax and labor obligations as follows:
- the company's taxes depending on: each of the partner's percentage of quotas (a pro rata);
- and the period of time they have been partners; and
- the company's labour obligations up to the percentage of each partner's quotas.
Environmental liabilities do not extend beyond the mining project company.
18. Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction.
19. In recent times, several governments have mandated concession renegotiation, or revisited royalty and taxation regimes in light of increased commodity values. Has there been any such activity in your jurisdiction?
Colombian government has respected the terms agreed upon by the parties in mining concession agreements and has not mandated the renegotiation of the concession agreements, nor of the royalties or taxation regimes.
20. Please provide electronic links to any of the principal statutory and regulatory compilations referred to in your answers to the foregoing questions, including items such as Mining Law, foreign investment regime applicable to mining and environmental law and regulation.
- www. mincomercio.gov.co/eContent/verimp. asp?id=5438&IdCompany=7
- http://domino.creg.gov.co/Publicac.nsf/ 1aed427ff782911965256751001e9e55/c6e4638309b277b645256b480049 349d?OpenDocument
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.