MINERALOGY PTY LTD -v- SINO IRON PTY LTD [No 16] [2017] WASC 340 (24 November 2017)

MINERALOGY PTY LTD -v- SINO IRON PTY LTD [No 16] [2017] WASC 340 (24 November 2017) - WASC 2017 case summary — Zoe

[349]

CITIC PACIFIC

CITIC Pacific Limited

(Incorporated in Hong Kong with limited liability)

Stock Code: 267

MAJOR TRANSACTION

ACQUISITION OF MAGNETITE MINING RIGHTS IN WESTERN AUSTRALIA

Under the transaction agreed, the Company will have, potentially, mining rights over 6 billion tonnes of magnetite ore over the Mining Area in the western Pilbara region of Western Australia located near the mouth of the Fortescue River. The mining rights will be held through companies the Company may acquire which hold sub-leases (ie sub mining rights) from the Seller, an independent third party, which in turn holds the mining rights direct from the Western Australian Government.

On 31 March 2006, a wholly owned subsidiary of the Company agreed to acquire from the Seller the entire interest in Sino-Iron (which has the right to extract 1 billion tonnes of magnetite ore in the Mining Area) for US$215 million (approximately HK$1,677 million). On the same day, another whollyowned subsidiary of the Company agreed to, conditional upon addition 1 billion tonnes of magnetite ore resources being proven by the Company after it completes an agreed drilling program in the same area, acquire from the Seller the entire interest in Balmoral (which will have the right to extract 1 billion tonnes of magnetite ore in the Mining Area) for US$200 million (approximately HK$1,560 million), adjusted for Inflation.

...

Sino-Iron and Balmoral will arrange the financing of the construction of the infrastructure for the Project. The estimated capital expenditure payable for Sino-Iron (ie the first 1 billion tonnes of magnetite ore) is US$1,370 million (approximately HK$10,686 million), and the estimated capital expenditure payable for Balmoral (ie the second 1 billion tonnes of magnetite ore) will be US$1,100 million (approximately HK$8,580 million).

The Acquisition of Mining Rights enables the Group to explore for magnetite ore to ensure a constant and sufficient supply of raw materials for the furtherance of its special steel manufacturing business and also to invest in a magnetite ore mining business.

...

INTRODUCTION TO THE ACQUISITION OF MINING RIGHTS AND BACKGROUND IN RELATION TO MAGNETITE ORE MINING

Under the transaction agreed, the Company will have, potentially, mining rights over 6 billion tonnes of magnetite ore over the Mining Area in the western Pilbara region of Western Australia located near the mouth of the Fortescue River.

Magnetite ore is a ferromagnetic mineral form of iron ore, which can be further processed into concentrate, pellets or hot briquetted iron. These are the essential raw materials for the production of iron at the beginning stage of steel (including special steel) manufacturing process. It is estimated that the conversion ratio of magnetite ore to concentrate/pellets is 3.4 to 1 for this Project. There is no established open market value for magnetite ore.

The mining rights which the Company may acquire will be acquired by buying companies from the Seller, which companies hold sub-leases (ie, sub mining rights) from the Seller, which in turn holds the mining rights direct from the Western Australian Government.

The sub-leases will continue in force until, for each company the Group acquires from the Seller, the processing of its 1 billion tonnes of magnetite ore which has been taken from the Mining Area has been completed. After each sub-lease expires, the relevant company(s) that the Company has acquired will no longer have the mining rights in the Mining Area.

The magnetite ore will be processed into concentrate and pellets, hot briquetted iron or/and any other product produced from iron ore or magnetite. A royalty is payable to the Seller based on the quantity of magnetite ore extracted and products produced.

...

In order for Sino-Iron, Balmoral, or any other company the Group acquires from the Seller to export concentrate produced under the terms of the existing sub-lease, the approval of the Western Australian Government will have to be obtained from the amendment of the agreement between the Seller, the Western Australian Government and other relevant parties. Having made enquiries with the relevant entities (including entities within the Western Australian Government) on this matter, the Directors are confident of obtaining this approval.

...

THE SINO-IRON ACQUISITION AGREEMENT

Date

31 March 2006

Parties

(1) Mineralogy, as seller

(2) Sino-Iron Purchaser, as purchaser

(3) The Company, as guarantor of the Sino-Iron Purchaser's obligations under the Sino-Iron Acquisition Agreement

(4) Sino-Iron

...

Royalty

Sino-Iron agreed to pay to Mineralogy a royalty in respect of magnetite ore taken by Sino-Iron, quarterly during the term of the mining right granted by Mineralogy to Sino-Iron and other parties over the Mining Area.

Such royalty comprises two components:-

1st component (based on the quantity of magnetite ore taken) - A$0.30 (approximately HK$1.68) per tonne of magnetite ore taken by Sino-Iron (adjusted based on Inflation during the previous quarter).

2nd component (based on the quantity of products produced) - An additional royalty is payable quarterly to the Seller by Sino-Iron by reference to the market price of pellets and Mount Newman fines (as reference for the price of concentrate) and is calculated as follows:

(i) production volume multiplied by 50% and multiplied by the prevailing published annual FOB price (expressed in US dollars per dry metric ton unit) for pellets established by the largest supplier or seller of pellets in Brazil for export and multiplied by 68.1 and multiplied by an applicable rate in the range of 6% to 10% depending on the then prevailing market price for pellets; plus

(ii) production volume multiplied by 50% and multiplied by the prevailing published annual FOB price (expressed in US dollars per dry metric ton unit) for Mount Newman fines for export and multiplied by 68.1 and further by 1.05 and multiplied by an applicable rate in the range of 6% to 10% depending on the then prevailing market price for concentrates.

Notes:

[351]

Sino-Iron is required to produce not less than 6 million tonnes of product no later than seven years from 21 March 2006. If Sino-Iron fails to produce such quantity of products, it must, no later than one month following the end of the seventh year of 21 March 2006, pay to Mineralogy an amount equivalent to the royalty payable on the 6 million tonnes of products. The amount is estimated to be approximately US$42 million (approximately HK$327.6 million) if based on the 2005 market price. Such amount is in addition to the royalty that Sino-Iron shall pay to Mineralogy based on the actual product volume of the same year. The royalty will continue to be payable after the seventh year depending on the quantity of magnetite ore mined and the product volume. There will be no ceiling on such royalty.

The second component of royalty will cease to be payable if Mineralogy exercises the option granted to it to acquire shares in Sino-Iron in the event that Sino-Iron is listed on any stock exchange before 500,000 tonnes of product have been produced.

...

BASIS OF DETERMINATION OF CONSIDERATION AND SOURCE OF FUNDING

The basis for the determination of the consideration for Sino-Iron and Balmoral are that they will both be debt free on completion, with one major asset i.e. each with the right to extract 1 billion tonnes of magnetite ore from the Mining Area.

...

REASONS AND BENEFITS FOR THE ACQUISITION OF MINING RIGHTS

The Group is engaged in a diversified range of businesses, including manufacturing of special steel, property development and investment, basic infrastructure (such as power generation, aviation, tunnels and communications) and distribution of motor vehicles and consumer products.

Both Sino-Iron and Balmoral are principally engaged in the business of mining, extraction and processing of magnetite ore in the Mining Area.

Mineralogy, an independent third party, is principally engaged in the business of mining magnetite ore in Western Australia.

The Acquisition of Mining Rights enables the Group to explore for magnetite ore to ensure a constant and sufficient supply of raw materials for the furtherance of its special steel manufacturing business and also to invest in a magnetite ore mining business.

The Directors consider that the terms of the Acquisition of Mining Rights are normal commercial terms and are fair and reasonable and in the interests of the shareholders of the Company as a whole.

The Company intends to cooperate with partners of PRC background with expertise in mining and requiring constant supply of iron ore or related product to participate in the Project.

...

By Order of the Board

CITIC PACIFIC LIMITED

Alice Tao Mun Wai

Company Secretary

Hong Kong, 31 March 2006

[401]

The principles relevant to the proper construction of instruments are well known, and were not in dispute in this case. In summary:

(1) The process of construction is objective. The meaning of the terms of an instrument is to be determined by what reasonable person would have understood the terms to mean.

(2) The construction of a contract involves determination of the meaning of the words of the contract by reference to its text, context and purpose.

(3) The commercial purpose or objects sought to be secured by the contract will often be apparent from a consideration of the provisions of the contract read as a whole. Extrinsic evidence may nevertheless assist in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, its background, the context and the market in which the parties are operating.

(4) Extrinsic evidence may also assist in determining the proper construction where there is a constructional choice, although it is not necessary in this case to determine the question of whether matters external to a contract can be resorted to in order to identify the existence of the constructional choice.

(5) If an expression in a contract is unambiguous and susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.

(6) To the extent that a contract, document or statutory provision is referred to, expressly or impliedly, in an instrument, that contract, document or statutory provision can be considered in construing the instrument, without any need for ambiguity or uncertainty of meaning.

(7) There are important limits on the extent to which evidence of surrounding circumstances (when admissible) can influence the proper construction of an instrument. Reliance on surrounding circumstances must be tempered by loyalty to the text of the instrument. Reference to background facts is not a licence to ignore or rewrite the text. The search is for the meaning of what the parties said in the instrument, not what the parties meant to say.

(8) There are also limits on the kind of evidence which is admissible as background to the construction of a contract, and the purposes for which it is admissible. Insofar as such evidence establishes objective background facts known to the parties or the genesis, purpose or objective of the relevant transaction, it is admissible. Insofar as it consists of statements and actions of the parties reflecting their actual intentions and expectations it is inadmissible. Such statements reveal the terms of the contract which the parties intended or hoped to make, and which are superseded by, or merged into, the contract.

(9) An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience. However, it must be borne in mind that business common sense may be a topic on which minds may differ.

(10) An instrument should be construed as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation.

(11) Definitions do not have substantive effect. A definition is not to be construed in isolation from the operative provision(s) in which the defined term is used. Rather, the operative provision is ordinarily to be read by inserting the definition into it. (footnotes omitted)

[420]

Thus, the first draft provided in terms that the trustees should be obliged to make a payment if there were a default. The wording was changed when the second draft was prepared and thereafter subsequent drafts of the deed provided for the trustee to have a discretion. The extent to which the deletion of words from a contract may be taken into account in construing it has been a matter of controversy giving rise to what Diplock J referred to as 'a pleasant diversity of authority': Louis Drefus & Cie v Parnaso Cia Naviera SA [1959] 1 QB 498, at 513. Some at least of those authorities have distinguished between the rejection of words put forward in drafts of a contractual document crafted for the occasion and deletion of words from a document serving as a precedent, that deletion being inadmissible as an aid to construction in the former case but admissible in the latter case: see eg NZI Capital Corporation v Child (1991) 23 NSWLR 481 at 490; Timber Shipping Co SA v London & Overseas Freighters Ltd [1972] AC 1 at 15 - 16). However, although Mason J expressed his view tentatively on this matter in Codelfa, I consider that the trend of authority is in favour of receiving evidence of the fact of deletion of an expression if to do so would negative an inference sought to be drawn from surrounding circumstances that the contract bears a meaning positively rejected by the deletion. See NZI Capital Corporation v Child; MCA International BV v Northern Star Holdings Ltd (1991) 4 ACSR 719; Brennan v Kinjella Pty Ltd (1993) 6 BPR 13,168. The application of that approach in the case of a deed poll is not without its difficulty. In the case of a contract it is possible to examine the facts to see whether there was an actual intention of the parties evidenced by their concurrence in rejecting the deleted words. With a deed poll, the bare fact of deletion of words may be equivocal: does it mean only that the draftsman had second thoughts about the manner of expression of his instructions or does it mean that the party concerned turned its mind to the issue and chose to reject the meaning conveyed by the rejected words [19]?

[467]

The underlying machinery for Royalty Component A can be seen via cl 8.2(a) to be tied to item 5 of the Schedule in both MRSLAs. There is also via cl 8.2(b) a regular review of the level of Royalty Component A. This is conducted on a quarterly basis, by reference to 'CPI Movement'.
Whilst item 5 of the Schedule shows that Royalty Component A is payable by reference to Magnetite Ore taken, the underlying referenced subject matter in respect of the other aspect of the royalty is differently constructed in terms of the underlying subject matter. Both the components A and B are necessary to in aggregate derive the 'Mineralogy Royalty'.
By cl 8.2(a) of the MRSLAs the Mineralogy Royalty is an amount of money which needs to be 'calculated'. An arithmetic formula is provided to complete this calculation. It is the summation of Royalty Component A and Royalty Component B.
The word 'calculated' is seen then to be used yet again later in cl 8.2(a), now in a context of defining the basis upon which the Royalty Component B is to be ascertained. A second mathematical formula is provided in order to perfect this calculation for RCB.
As seen, the formula provided for the calculation of the monetary quantum of what is referred to as Royalty Component B provides a more complex algebraic formula. As an objective assessment, the provision of that formulae and the calculations to be undertaken all suggest to me a laying down, at this point, of elaborate machinery - in order to derive with precision the royalty money amounts which are to fall due to Mineralogy, on a quarterly basis.
As now seen, certain pricing ingredients used within the Royalty Component B formula post 2006 have proven, or are said to be, problematic in terms of their ascertainment. That is the case particularly as regards the subject matter that is referred to by the acronym PP (which I assume for present purposes is meant to signify a reference to pellet price) and also a counterpart formulae acronym CP (which I assume for present purposes signifies concentrate price - although those conclusions concerning the meaning of the two acronyms are an inference I have drawn, rather than being matters that are explicitly stated).
It is apparent from the defined term 'Product' that it is the commencing point in the equation for both the PP and CP components in the formula specified to derive Royalty Component B. 'Products' is defined in the MRSLAs' early definition clause (cl 1.1) as:

[640]

[125] This subclause forms the basis of a discrete field of further conflict in this action between the parties, under Mineralogy's contention that cl 6.3(b) has now been affirmatively engaged in its favour, against Korean and Sino's countercontention that the clause has not been engaged - since they have been prevented under cl 6.3(a) from achieving the production of 6 million tonnes of Product, for various reasons said to be outside their control.

[126] Whatever is ultimately to be made over that cl 6.3 dispute (with the CITIC parties also contending that the clause is, in any event, unenforceable as a penalty) the internal reference as seen in cl 6.3(a) to 6 million tonnes of Product and the specified payment to Mineralogy under cl 6.3(b) of an amount equivalent to the Mineralogy Royalty payable on the amount of Magnetite Ore required to produce 6 million tonnes of iron ore concentrate, on the face of it looks to me to carry a strong resonance to the RCB royalty, as defined under cl 8.2(a). On the face of it, cl 6.3 looks to have been framed, objectively assessed, with an eye to secondarily shoring up for Mineralogy an amount towards the royalty sum which it would otherwise have received under cl 8.1 and cl 8.2 to a plateau level - should there prove to be a failure to generate 6 million tonnes of concentrate as Product by March 2013, after seven years of the MRSLAs being on foot.

[127] Whilst the precise workings and implications of this clause, which looks at first blush to be something like a longer term minimum performance guarantee by Korean and Sino, will need to be settled later, it does for necessary purposes at present look to be a clause that is derived from and linked to the underlying consideration by way of royalty for Mineralogy which is specified as RCB.

[128] A second wider feature of the MRSLAs which I would also note was remarked upon by Newnes JA in his reasons at [92]. This is cl 14.1(b) in each of the MRSLAs. Pursuant to this provision, a future surrender of RCB by Mineralogy will be the 'exercise price [of] an option Mineralogy [had] under the MRSLAs to acquire up to just under 20% of Sino Iron and Korean Steel'.

[129] To that end, the clause identifies the 'Exercise Consideration' for 'Option Shares', on a basis that the option would be 'exercised for the sole consideration of Mineralogy surrendering and releasing Royalty Component B as set out in clause 8.2(a)'. The proviso to cl 14.1 identifies that no other price or consideration is payable by Mineralogy for the issue of the Option Shares other than the Exercise Consideration.

[130] Once again, therefore, there appears to be a further function for Royalty Component B to possibly play within the MRSLAs as a whole, effectively as surrendered option consideration that might in the future be given up by Mineralogy, in order for it to obtain significant levels of shareholding in Korean and Sino, up to the level in each case of Mineralogy just under a substantial shareholder.

[131] Given those wider roles played by RCB in the MRSLAs in the two aspects I have just identified, it presents to me as again, prima facie, being very difficult to see at present how, given all that, it could be possible to blue pencil sever RCB out of the MRSLAs, on a basis that this calculation formula is uncertain and unenforceable as the CITIC parties contend - but leaving, nevertheless, an otherwise fully intact long-term future ongoing relationship for the MRSLAs, post that severance surgery. Such an amputation would, on the face of it, seem to render a significant violence to the nature of the initial bargain, not only as regards the legal consideration to be received by Mineralogy as a royalty payment over time, but also as regards the role to be played by RCB in relation to a plateau sum which is sought to be reinforced under cl 6.3 and also as potentially surrenderable option consideration to operate under cl 14.1.

[132] The blue pencil amputation advocated by the CITIC parties would appear to do a significant violence to the character of the residual bargain that is left subsisting as between the parties to the MRSLAs.

[133] These observations are of course only rendered on a prima facie basis, but the two wider MRSLA features which I have now noted (non-exclusively) suggest to me at present that the role and function of RCB within the MRSLAs extends a considerable way beyond its bare manifestation at cl 8.2. A consequence, correlatively, is that the severance of Royalty Component B might presently be viewed as more akin to the amputation of a human limb, rather than to the trimming of an inconvenient overgrown fingernail. There are, of course, numerous severance authorities canvassing these principles but, on my assessment, the law in this area is well settled: see generally MacKinlay v Derry Dew Pty Ltd [2014] WASCA 24; (2014) 46 WAR 247 [75] - [76], [135]; Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24; (2013) 45 VR 657 [98].

[906]

I reach the above conclusion on the basis that:
- Iron ore benchmark prices were negotiated annually by the most significant players (representatives of the major producers and a representative of large customers for a reference product), with the first producer and steelmaker to reach agreement in the course of the annual negotiations effectively fixing the benchmark for the whole market. By contrast, there are multiple indexes developed by different PRAs, built from samples of daily spot trades from across the relevant seaborne market, which therefore represent average actual prices. These price assessments are now available on a daily basis.
- Once fixed, the iron ore benchmark price was applied to settle all contractual iron ore transactions of a comparable specification during the relevant year. The three major producers and large steelmakers thus committed to trade at the benchmark, irrespective of whether economic circumstances changed during the course of the year. Hence the volatility of the benchmark within any given Japanese fiscal year was zero. By comparison, index prices vary depending on the time period selected, and can be quite volatile. For example, using the Platts index for 62 per cent iron ore delivered China the price fell from $65.75/t on 10 June 2015 to $38.50/t on 15 December 2015, rose to $70.50/t on 21 April 2016, fell to $49.30 on 2 June 2016 before rising to trade at around $80/t at the end of calendar year 2016.
- Benchmark prices were negotiated at a particular point in time for the subsequent year and could only reflect the historical information available to the respective parties at the time of the negotiations, and their expectations about economic conditions in the coming year formed on that basis. Negotiations were conducted in private with only those participating knowing how demand and supply conditions were ultimately factored into the final iron ore benchmark price. This is a key difference with index prices. In the absence of face-to-face negotiations taking place each year, it is impossible to know the many factors that might have come into play in reaching final agreement on the benchmark. Time pressure is another important feature of the benchmark system that is absent from the formation of index prices, since the first parties to reach agreement set the benchmark conditions for other market participants (see exhibit 17, pages 199 - 200).

[986]

Whilst the benchmark pricing system for iron ore, based on annual bilateral negotiations, was the prevailing published price in all relevant years prior to 2010 for iron ore products (including iron ore fines and pellets), all sales contracts moved to an indexbased pricing system on or before April 2010. This was due to a push by both major steelmakers and major iron ore suppliers to increase market transparency. Prior to this transition in pricing system for iron ore products, transactions on a cost and freight (CFR) basis had increased and a spot market for iron ore had developed, expanding continuously from around 2002 to reach an estimated share of 40% of global seaborne trade in 2009.
At no time do I look to replicate the benchmark pricing system in calculating a prevailing published price for iron ore fines or pellets for the period Q1/2013 to Q1/2017 inclusive.
The prevailing published price for specific iron ore products after 2010 became the iron ore fines price, with other products (such as lump ores, blast furnace pellets and direct reduction pellets) earning price premia over that price. As agreed in paragraph 6 above, the Platts IODEX 62% fines price has been the principal iron ore price reference since April 2010. The Platts prices are quoted in US$/dmt, CFR Qingdao and are published on most weekdays of the year.
From the daily published prevailing prices (quoted in US$/dmt, CFR), a netback calculation using the published ocean freight rates from specific origins (Pilbara region, WA for Mount Newman fines equivalent product; and Tubarao for Brazilian pellets) can be used to convert this price to FOB. These netback calculations are widely used in the iron ore market by industry participants and have been for a period of time that predates April 2010 to the present.
The daily prevailing FOB prices can then be averaged on a quarterly and annual basis to derive prices over these periods. Indeed, Rio Tinto (widely known as the second largest producer of iron ore in the world) publishes an average FOB Platts price per dry metric tonne for 62% iron Pilbara fines in its halfyear and fullyear financial results.
The annual average prevailing FOB prices (quoted in US$/dmt) can then be converted to prices quoted in US cents/DMTU by applying the average iron grade for that product, which in the case of Platts IODEX 62% fines is obviously 62%.

[1013]

Under the Benchmark Pricing System, prices were determined and quoted on an FOB basis in US dollars per DMTU. Quotation on a DMTU basis inherently accounted for variations in Fe grade as it established a system by which the price per physical tonne of ore varied consistently and proportionately with the iron grade. By contrast, index prices are quoted per dry tonne at a reference iron grade that is specific to each index. As a result, index prices may require adjustment to reflect the actual Fe content of iron ore sold under particular contracts, or even the Fe content of individual shipments.
Mr Brierley has sought to convert available prices published on a DMT basis to DMTU by simply dividing the referenced DMT price by the assumed % Fe content, to arrive at a purported DMTU. However, Mr Brierley's methodology ignores the fact that, as he accepted, the relationship between Fe content and price is not linear, ie an increase in Fe content will not necessarily carry with it a proportionate increase in price. Mr Brierley's methodology for converting prices quoted in DMT to DMTU is thus imprecise and unreliable. Additionally, the specific Mount Newman fines and Brazilian pellets grades are not publicly available and are unknown, making any conversion arbitrary.
Index pricing recognises this lack of linearity, as reflected by the fact that Platts assesses and publishes the value of each 1% in the range 60% to 63.5% as a separate index. The value of this differential varies significantly from the purported 'equivalent perDMTU' price that Mr Brierley's methodology assumes can be obtained simply by dividing a perDMT Platts 62% Fe fines index price by 62. The same is true of Vale's pellets, the FOB pricing of which is not proportional to iron content. Vale's product mix, which includes the more valuable direct reduction pellets (which attract a disproportionately higher premium than simply their higher Fe content would imply), means that it is not possible to derive with sufficient accuracy a DMTU price for Vale's pellet exports by simply dividing an estimated average sale price by an assumed average iron grade.

[1136]

I accept the constructional choice of the MRP phrase contended by Mineralogy. Consequently, US dollars amounts of RCB royalty monies are due by Sino Iron and Korean Steel to Mineralogy as from the 15th day of each following month after each quarterly period in which RCB is payable;
the quarterly US dollars per DMTU reference prices that are necessary to derive PP and CP in respect of the two reference products as nominated within the RCB formula in MRSLA cl 8.2(a) are, and have always been and remain, fully capable of a reliable ascertainment and quantification when required in order to calculate RCB amounts on a quarterly basis;
there has not been and remains no legitimate or principled basis to sever the RCB component of the Mineralogy Royalty as provided for under cl 8.2(a) from the MRSLAs. The Mineralogy Royalty (namely, RCA and RCB) is an essential aspect of the legal consideration Mineralogy is to receive under each MRSLA. A severance of RCB from the MRSLAs (leaving the Mineralogy Royalty as comprising only of RCA, with no product volume royalty entitlements, as the MRSLAs are to be performed as longterm contracts in future) would deliver a resultant disruption of seismic proportions to the essence of each MRSLA. Severance of RCB out of each MRSLA is not an outcome seriously open for the CITIC defendants to contend - were it ever necessary to consider the recourse to severing RCB from the MRSLAs (which I conclude is not required since RCB is well capable of ascertainment).
the quantification and ascertainment of the amounts of RCB that are payable to Mineralogy, in each quarter from and after the quarter ending at 31 December 2013, by Sino Iron and Korean Steel is a task perfectly suited for and capable of being carried out by an independent expert rendering a determination under cl 8.6 and cl 33 of each MRSLA;
notwithstanding that, I have determined the amounts of RCB due to Mineralogy in the December 2013 to March 2017 quarters upon the trial evidence;
an expert determination (absent manifest error) is final and binding as between the MRSLA parties once carried out by a properly appointed expert who is acting under cl 8.6 of each MRSLA and is following the MRSLA expert determination process under cl 33;
these proceedings were commenced by Mineralogy on 18 March 2013 out of the Supreme Court of New South Wales before being transferred on 30 April 2013 to the Supreme Court of Western Australia under the national cross-vesting legislation. At that time, no amounts for RCB were due by Sino Iron or Korean Steel to Mineralogy. Production of 'Product' had not then begun. At that time Mineralogy was only claiming amounts under cl 6.3(b) of each MRSLA;
it is not presently open under Western Australian law as a matter of procedure to pursue liquidated amounts of money that fall due in a period that is after the Western Australian proceedings have been commenced. However, these proceedings were originally commenced by Mineralogy out of the Supreme Court of New South Wales. The New South Wales procedural position, under reforming legislation against the Eshelby principle, is less prescriptive to a full determining of pleaded causes of action as raised. Here, New South Wales procedure rules should be used in this trial as a matter of overall fairness in the circumstances I have related;
MRSLA disputes between Mineralogy and Sino Iron and Korean Steel over RCB amounts, as claimed by Mineralogy in quarterly periods after 31 December 2013 and thereafter, could have been pursued under the MRSLA expert determination process had there been an ability to appoint an expert to perform that task under cl 8.6 of each MRSLA and the process allowed by cl 33 in those agreements;
parties to the MRSLAs must act in good faith towards each other. This is an express good faith obligation applicable between them imposed under cl 37.4 of the MRSLAs. Furthermore, by the term implied by law in all commercial contracts, the MRSLA parties must also cooperate with each other in conferring the benefits of their contractual relationship upon each other: see Secured Income. Good faith and proper cooperation, I would conclude, extend to participating in any future joint requests with Mineralogy issued under MRSLA cl 33.2(b) to appoint an expert to undertake the ascertainment and quantification of RCB claimed as due under cl 8.2(a) in future periods;
the issues put by Sino Iron and Korean Steel against a utilisation of an expert under cl 8.6 were either misconceived, or have now been rendered otiose, once a true meaning of the MRP phrase as used in PP and CP within the RCB calculation formula is determined in this litigation;
the CITIC defendants must cooperate in future with Mineralogy and join it in any future requests made to the relevant nominating body under cl 33.2(b) for that person to nominate the expert to perform the role and tasks under cl 8.6 as regards determining disputes over RCB amounts in future quarterly periods.

[1242]

There is common ground between the parties' experts on a range of matters that are relevant to whether a prevailing published annual FOB price can be calculated with sufficient accuracy.
The experts agree that the benchmark price that had been set under the annual Benchmark Pricing System prior to March 2010 was a reference price. That is, upon the price being settled, it acted as a price by reference to which other contracting parties entered into commercial arrangements for the sale of iron ore products.
Indexbased pricing has since come to be the pricing system that is applied 'almost universally' in long term agreements for the sale of iron ore. It refers to a methodology under which a selected spot market index is averaged over a contractually agreed quotation period to generate a price. They also agreed that Platts IODEX 62% fines price has been the principal iron ore price reference since April 2010. The Platts IODEX 62% fines price is an assessment of the spot market prices of cargoes of iron ore into China. Prices are quoted on a cost and freight, or 'CFR' basis and are denominated in US Dollars per Dry Metric Tonne. Mr Brierley gave oral evidence that Vale, Rio Tinto and Fortescue (the first, second and fourth largest producers of iron ore respectively) all now use the Platts IODEX 62% fines price. Dr Fisher agreed that BHP, Rio Tinto and Vale have sold about 85%, 92% and 69% of their respective volumes on some form of indexed pricing.
The defendants' experts also agreed that quotation period over which the price is averaged is a matter for negotiation between contracting parties. Commercial parties have to make choices as averaging periods for their contracts. It is a tradeoff between volatility and currency. Generally speaking, the longer the averaging period over which prices are smoothed, the less variability in price should be seen. A rolling average will typically smooth the series of prices. Lagging the average by a period makes the price less current, but more predictable, because it is calculated on past prices already known to the parties. Currently, laggedquarter, currentquarter and monthly averages are all commonly used. Once a base price has been calculated by averaging over the contractually selected averaging period, it may be adjusted for the difference between the iron content of the index specification and that of the delivered product. Other adjustments may be applied, including for ocean freight and ore quality.
Where the relevant ocean freight rate is not known, spot market freight rates can be used to derive FOB prices known as netbacks from the quoted CFR prices. The Baltic Exchange is a reliable supplier of published spot ocean freight rates, quoted in US dollars per wet metric tonne.
The working out of calculation using 'PP' and 'CP' inputs involves some assumptions. [Mr] Barkas agreed with Mr Birkett at [6] of the joint memorandum that the calculations in Mr Birkett's report evaluating Royalty B are dependent on intuitive and reasonable assumptions that, in clause 8.2(a) of the MRSLAs, Product is to be measured in dry (rather than wet) tonnes and the words 'of the pellet price' and 'of the concentrate price' are to be disregarded.
What is in contest between some of the experts is whether reference 'PP' and 'CP' prices can be calculated with sufficient accuracy. Mr Brierley has given evidence that it can be done with reasonable accuracy. When pressed in crossexamination for an answer as to what he considered to be 'reasonably accurate', Mr Brierley indicated plus or minus 12%.
Mr Barkas, Dr Fisher and Mr Buckley expressed the view that 'Mr Brierley's calculation methodology may be sufficient in the context of an analyst attempting to estimate trends of net earnings', but were not sufficient 'to accurately estimate the FOB price inputs required for definitive calculation' of Royalty B (emphasis added). Properly understood, this is a difference of degree, with Mr Brierley content with a 'reasonable accuracy' of +/12% and Mr Barkas, Dr Fisher and Mr Buckley declaring the calculation not to be 'definitive'.
Unhelpfully, in places, the defendants' experts appear to move from consideration of whether a reference price can be calculated from currently available price indices to whether a price can be derived that is an 'analogue' of, or that 'replicates', the benchmark price. This is unhelpful as the latter matter does not assist in answering the question before the court. For example:

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Judgment (1253 paragraphs)

Legislation Cited (11)

Cases Cited (38)