Though much has been made in the media of the ‘death’ of the mining boom in Australia, it is easy to forget the cyclical nature of the industry and exploration is occurring all the time, whether for new mining ventures or to expand existing ones.

Farm-in and Farm-out Agreements are common in the Australian exploration sector, and are very similar.

A Farm-in Agreement is an agreement whereby the owner of an interest in a lease or licence (Farmor) grants the right to acquire a percentage of their interest to another party (Farmee) for the purpose of exploration.

Ordinarily, the Farmor has already undertaken some exploration, and seeks another party to share the costs of undertaking further exploration or completing it.

The Farmee, in return, is required to contribute cash towards meeting the costs of exploration, incurring certain expenditures for exploration or meeting specific commitments by way of undertaking further exploration or development of the lease or licence.

A Farm-out Agreement is very similar to a Farm-in Agreement, however, usually the Farmor is in a position where the Farmor is not able to complete exploration within the time allowed for under the lease or licence, either due to resourcing or budgetary constraints. The Farmee then essentially takes over the remainder of the exploration, whilst the Farmor retains a financial interest.

Often, Farm-in/Farm-out Agreements specify that more than one interest (or percentage) is transferred at various stages of exploration.

So what are the benefits of Farm-in/Farm-Out Agreements?

• where there are staged increases in the interest, it provides a staged earning process;

• for the Farmor – maintaining a working interest in the lease or licence whilst reducing risk;

• for the Farmor – maintaining a working interest in the lesae or licence even if they are financially unable to continue exploration;

• for the Farmee – obtaining an opportunity for potential profit that they would otherwise not have access to (because they don’t otherwise hold the rights in the lease or licence);

• there can be some tax advantages, depending on whether the transfer is immediate or deferred;

• transfer duty concessions (not available under a straight transfer of the lease or licence).

There are a number of requirements and key considerations to be respected when entering into a Farm-in/Farm-out Agreement, however.

If you would like further information on Farm-in/Farm-out Agreements, please contact Karen to see if we can assist you.

The content of this article is intended in the nature of general information, and cannot be relied upon as legal advice. You should seek specialist advice about your particular circumstances.