Brazil holds a strategic global position in the exploration of critical minerals, such as lithium and rare earths, representing an opportunity for domestic and international lenders and mining companies.
With approximately 23.1% of known global rare earths resources and ranking 12th in lithium reserves, the development and operation of mines in the country have facilitated a growing volume of transactions, including: (i) direct lending from foreign lenders to the foreign controlling shareholders of Brazilian mining companies; (ii) direct lending from foreign lenders to Brazilian mining companies; and (iii) export prepayment from foreign lenders to Brazilian mining companies to finance the export of critical minerals.
We highlight below 5 legal insights regarding the structuring of financial transactions between lenders and mining companies:
1. Key Terms and Conditions of the Financing Agreement: Lenders and mining companies (as borrowers) must negotiate terms and conditions, including the credit line amount, whether it will be structured in tranches, drawdown procedures, applicable interest rates, repayment terms, mandatory amortization events, and default charges, among others.
2. Financial and Operational Covenants in the Financing Agreement: (i) Regarding financial covenants: agreements may stipulate a minimum liquidity ratio based on cash and cash equivalents.
It is common for contracts to also include negative covenants, such as prohibitions on indebtedness exceeding a specific threshold, negative pledge clauses, restrictions on profit distributions, limits on corporate transactions and asset sales, and restrictions on related-party transactions.
Regarding affirmative covenants, standard practice includes requirements for audited financial statements (if available) and notification obligations in the event of occurrences having a material adverse effect, among others.
3. Events of Default under the Financing Agreement: Provisions must be made for events of default regarding the payment of principal and interest, breach of representations, non-compliance with covenants, insolvency, loss of mining rights, cross-default, Material Adverse Effect, administrative or judicial rulings causing a Material Adverse Effect, and the filing of a request for out-of-court or in-court reorganization or a bankruptcy petition.
4. Regulatory Compliance (Environmental, Anti-Corruption, Sanctions, and Social-Environmental) under the Financing Agreement: It is essential to include provisions regarding environmental, anti-corruption, sanctions, and social-environmental compliance, including audit rights and standalone default triggers.
5. Collateral Package Linked to the Transaction: Financial transactions generally provide for (i) guarantees (under foreign law) and/or aval/fiança (under Brazilian law) from controlling shareholders and affiliates; (ii) pledges over shares of the operating company and affiliates; and (iii) security interests over mining rights and other relevant assets, among others, depending on the specific transaction.
Given their strategic global position in the exploration of critical minerals, domestic and international lenders and mining companies will increasingly enter into credit transactions to finance the development and operation of mines.
