On 7 November 2018, a Permanent Court of Arbitration Tribunal found against the Plurinational State of Bolivia (Bolivia) and awarded South American Silver Limited (SAS, the Claimant) damages of $18.7 million (plus interest and costs) for the loss of mining concessions in Bolivia, significantly lower than was claimed by SAS.
SAS, a Bermuda based subsidiary of TriMetals Mining Inc (listed on the Toronto Stock Exchange), had been involved in mining in Bolivia since 1994, with five large scale mining projects. During the period 2003 to 2008, SAS acquired 10 mining concessions in the area of Malku Khota (the Project). From 2005, SAS commenced studies including exploration and also invented and patented an exclusive hydrometallurgical process to extract metals.
On 1 August 2012, Bolivia issued Supreme Decree No. 1308, whereby the mining rights reverted back to the State of Bolivia, which SAS described as an expropriation.
The Claimant claimed compensation under the UK-Bolivia bilateral investment treaty.
Position of the parties
SAS submitted a claim for total loss of the Project value of US$307 million plus interest (pre and post award).
The parties disagreed on the approach to deriving the fair market value of the Project given that it was in its early stages.
On liability, the Tribunal found in favour of SAS, but awarded damages significantly lower than claimed. This article considers the quantum aspects.
The Claimant did not apply a discounted cash flow (DCF) methodology given the early stages of the project and lack of historical cash flows. Instead, the Claimant adopted a market approach, utilising a combination of comparable transaction valuations, valuations by industry analysts and the value implied from private share placements. The claimant applied a weighting of 50%, 25% and 25% respectively to these three bases to derive a claim, before interest, of $307 million.
The Claimant’s position being that these were sufficiently reliable for purposes of determining the fair market value of the Project.
The Respondent also accepted that a DCF approach was not appropriate given the Project was at the discovery stage and production had not started.
However, the Respondent claimed the valuation approach taken by SAS was not conventional. Furthermore, it argued that the comparable transaction valuations where not truly comparable, ignored the fundamental risks of the Project and that the analysts’ underlying valuations were based on DCF methodology, which both Parties had agreed was not applicable.
The Respondents’ approach was to determine market value for SAS’ investment based on the investment cost, which it contended was appropriate when DCF was not applicable. The Respondent contended that production had not commenced, so, without a basis for estimating future cash flows, the investment was worth, at most, what the Claimant invested in the Project.
Approach taken by the Tribunal
The Tribunal decided that the Claimant’s approach was not a convincing estimation of the fair market value for several reasons. The Parties agreed that the Project was unique and therefore the analysis performed could not be based on “generally comparable” properties, the analysts underlying approach reflected a DCF methodology, which the Claimant accepted was not appropriate for this Project, and the percentage weighting was subjective with no detailed and convincing explanation for the percentage allocation.
For these reasons the Tribunal could not ascribe a value for damages under the Claimant’s basis with reasonable certainty. The Tribunal found that the appropriate basis for damages was the investment made by the Claimant and awarded USD$18.7 million (plus interest). The Tribunal rejected the Claimants request to include administrative and general expenses of SAS (amounting to US$12.5 million) in assessment of investment in the Project as such costs could not be apportioned across the relative value of projects without even attempting to establish a relationship between such costs and the project value.
The Tribunal (and Parties) agreed that the DCF valuation methodology was not appropriate for a Project at such an early stage, without certainty of cash flows. Furthermore, there was not sufficient certainty for the Tribunal to attribute a value using a market approach and preferred the investment cost basis to attribute a fair market value for the Project.
Claimant: South American Silver Limited (Bermuda)
Respondent: The Plurinational State of Bolivia
Case ref: PCA Case No: 2013-15
Members of the Tribunal
Dr. Eduardo Zuleta Jaramillo, President (Columbia) Prof. Francisco Orrego Vicuna (Chile)