On 12 July 2019, an ICSID Tribunal delivered its decision against the state of Pakistan in favour of Tethyan Copper Company PTY Limited (TCCA).
This long-running dispute with a complicated procedural backdrop resulted in the Tribunal awarding TCCA USD 4 billion in damages and pre-award interest (reportedly some USD 1.7 billion) for the denial of a lease to mine copper and gold deposits in the Pakistan province of Balochistan, explains Harshad Bharakhada.
The Claimant, TCCA, is a company registered in Australia and equally owned by Antofagasta Plc (a UK company) and Barrick Gold Corporation (a Canadian company). In 2006 TCCA became a party to the Chagai Hills Exploration Joint Venture, in which the Claimant had 75% interest and the Balochistan Development Authority (on behalf of the Bolchistan provincial government) held a 25% interest.
Following submission of significant feasibility studies in 2010 triggering participation in the mining development, TCCA’s attempts to obtain a mining lease in 2011 was frustrated by the Licensing Authority of Balochistan. In 2012, the provincial government of Balochistan was granted permission to start mining operations.
The Tribunal set out its decision on liability issues in its Decision on Jurisdiction and Liability on 10 November 2017. This latest decision deals with whether TCCA would have concluded a mineral agreement, established a feasible project and, if so, the quantum of damages that flowed. The Claimant claimed compensation under the Australia-Pakistan bi-lateral investment treaty.
Position of the parties
TCCA claimed damages of USD 8,490 million over the life of the mining project. The Respondent contended that the real value of the project is speculative and did not exceed USD 149 million. The parties disagreed on the approach for deriving the fair market value of the mining project. The Tribunal found substantially in favour of TCCA and this article considers the quantum aspects.
TCCA applied a discounted cashflow (DCF) methodology on the basis that it was “practical, industry-informed application of well-established principles” and that it described as being decades-old, widely taught in business schools and routinely applied in the mining industry. The approach was referred to as a ‘modern DCF’ in that the cashflows reflected both systematic and asymmetric risks for the mining project and, therefore, the cashflows were discounted using a risk-free rate (based on US treasury yields).
The Respondent contended that the modern DCF approach adopted by TCCA was a “rather unique variation of a discounted cash flow (DCF), which has not been adopted by the mining industry or investment tribunals”. Further, the Respondent contended that the DCF approach is not appropriate for investment projects that have not demonstrated their capacity to generate profits by a track record of performance.
The Respondent contended that the only amount that can factually be supported with sufficient certainty would be sunk costs of the TCCA’s investment and that that was the correct approach to determining the fair market value.
Approach taken by the Tribunal
The Tribunal decided that the Respondent’s approach was not a convincing estimation of the fair market value for several reasons. The Tribunal considered that the question of whether the DCF approach (or similar income-based method) can be applied to value a project that has not yet become operational depends strongly on the circumstances of the individual case. In this case, the Tribunal found that it was an appropriate approach.
In terms of the specific approach, the Tribunal considered this modern DCF approach with cashflows reflecting all risks (both systematic and asymmetric) and discounted at a risk-free rate in detail. The Tribunal found that there were some risks (and assumptions) that had not been reflected. These included, for example, whether the mining lease would be renewed, security risks relating to the project, environmental and social impacts and the relevant royalty rate. Reflecting these risks, the Tribunal accepted that the cashflows could be discounted at a risk-free rate. The risk-free rate applied in TCCA’s DCF model was unchallenged and the Tribunal considered this to be the undisputed rate.
Overall, the Tribunal made adjustments totalling USD 4,403 million: USD 1,843 million in respect of risks and issues raised by the Respondent regarding the feasibility of the project and TCCA’s investment, plus USD 2,560 million in relation to risks the Tribunal identified to fully account for all project risks.
The Tribunal decided that, in this instance, the appropriate valuation approach was a DCF valuation methodology, and one that was described as the ‘modern’ type, with cashflows (after adjustments determined by the Tribunal) properly reflecting both systematic and asymmetric risks and, therefore, requiring the discounted value to be calculated by reference to a risk-free rate.