Bolivian Arbitration

Procedural Status of Arbitration

Arbitration Claim against the Bolivian Government for the Expropriation of Malku Khota Project

The Malku Khota project is located approximately 200 kilometres north of Potosi, Bolivia. Malku Khota is one of the world’s largest silver, indium and gallium resources with a NI 43-101-qualified Indicated Resource of 255 million tonnes of mineralized material containing 230.3 million ozs of silver, 1,481 tonnes of indium and 1,082 tonnes of gallium at a grade of 28.7 g/t silver, 5.8 g/t indium and 4.3 g/t gallium (43.8 g/t silver equivalent ), and an additional Inferred Resource of 230 million tonnes containing 140 million ozs of silver, 935 tonnes of indium, and 1,001 tonnes of gallium at a grade of 18.9 g/t silver, 4.1 g/t indium and 4.3 g/t gallium (33.0 g/t silver equivalent). (1)

Exploration commenced at Malku Khota in 2003 and work on the Project continued through to the expropriation in August 2012. After completing a total of 42,700 meters of drilling in 121 diamond core holes, and undertaking metallurgical testwork, process development and engineering design, a Preliminary Economic Assessment study was published in May 2011 showing a bulk-mineable heap leach operation with the potential to be one of the largest new silver, indium and gallium producing mines in development with over 13.2 million ounces of silver production annually over the first 5 years.

The Preliminary Economic Assessment showed a Pre-tax Net Present Value (NPV) for the project using a 5% discount rate of $1.5 billion and an Internal Rate of Return (IRR) of 63% at the “middle price case” of $25.00 per ounce of silver. (1)

After the publication of the Preliminary Economic Assessment, the pre-feasibility study (“PFS”) phase was started in June 2011. The ongoing work program, which was designed to expand mineral resources and enhance project economics, included the development of social and community programs to benefit indigenous communities, baseline studies for the environmental review and assessment program, exploration, metallurgical testwork, flowsheet development, engineering design and preparations to construct a modern 150 person exploration camp near the exploration site. The planned work programs including the PFS were not completed due to the expropriation.

On July 10, 2012, the Bolivian government announced to the media its intention to nationalize the Malku Khota project and on August 1, 2012, issued Supreme Decree No.1308 nationalizing the Malku Khota project. On October 23, 2012 the Company’s wholly-owned subsidiary, South American Silver Limited (“SASL”), delivered a formal letter to the Bolivian government notifying it of an investment dispute between SASL and Bolivia. The dispute has arisen as a result of acts and omissions of the Government of Bolivia including the issuance of Supreme Decree No.1308 which revoked mining concessions held by Compañia Minera Malku Khota S.A. (“CMMK”), a wholly-owned subsidiary of SASL, without any compensation.

SASL is a company incorporated in the Bermuda Islands, an overseas territory of the United Kingdom, which through its wholly owned Bahaman subsidiaries, Malku Khota Ltd., G.M. Campana Ltd. and Productora Limited., owns one hundred per cent of the outstanding shares of CMMK. SASL is a protected investor under the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Bolivia for the Promotion and Protection of Investments (“Treaty”), and the actions and omissions of the Bolivian Government are in violation of the Treaty and of international law. Bolivia has breached the Treaty’s requirement to provide full protection and security to foreign investors and their investments, as well as the Treaty’s protections against, among other things, expropriation without just and effective compensation, unfair and inequitable treatment, and less favorable treatment than afforded to Bolivian nationals or nationals of third states. Notification of the investment dispute triggered a six-month cooling-off period during which the disputing parties could negotiate a settlement.

Arbitration provides the forum for the Company to pursue fair value compensation for the expropriation of the Malku Khota project. Since the expropriation Supreme Decree, the Company has appointed the international legal firm, King & Spalding, to prepare and handle the claim. King & Spalding is being supported by prominent local counsel in Bolivia. Experts to assess the value of the damages have also been appointed.

On August 1, 2012, September 4, 2012, December 12, 2012, January 16, 2013 and February 14, 2013, SASL delivered letters to the Bolivian Government reiterating its willingness to attend meetings with Bolivian Government representatives to resolve the dispute amicably. The Government of Bolivia finally responded on February 21, 2013 and on April 17, 2013 a meeting was held but no resolution was reached and no compensation was offered.

The cooling-off period ended on April 23, 2013 and on April 30, 2013 the Company announced in News Release 13-09 that its wholly-owned subsidiary, SASL had commenced international arbitration proceedings against the Government of Bolivia under the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”) pursuant to the Treaty seeking compensation based on fair market value of the Malku Khota project. Concurrent with the Notice of Arbitration issued to Bolivia, SASL appointed its arbitrator to the Arbitral Tribunal. On June 28, 2013, the Bolivian Government responded to the Notice of Arbitration and appointed its own arbitrator. Each party challenged the appointment of the other party’s arbitrator on grounds of justifiable doubts as to his independence and impartiality but the challenges were ultimately rejected by the Permanent Court of Arbitration (“PCA”).  The appointed arbitrators could not agree on the appointment of a third arbitrator to act as president of the three-person Arbitral Tribunal so on January 22, 2014 the Secretary General of the PCA appointed the presiding arbitrator (see News Release NR 14-01 dated February 3, 2014).

On May 13, 2014, SASL attended its first Procedural Meeting with representatives of the Government of Bolivia and the three members of the Arbitral Tribunal, Messrs. Eduardo Zuleta Jaramillo (President), Francisco Orrego Vicuña and Osvaldo Guglielmino, at the Center of Arbitration and Conciliation of the Bogota Chamber of Commerce in Bogota, Colombia under the oversight of the Permanent Court of Arbitration (see News Release NR 14-12 dated May 14, 2014).

On June 3, 2014, SASL received Procedural Order No. 1 from the Arbitral Tribunal (Tribunal’s binding decisions on procedural matters).  With Procedural Order No. 1 the Tribunal fixed the place of arbitration at The Hague, the Netherlands (where the arbitration is considered legally held) and stated that the meetings and hearings will take place in Bogota (Colombia) or Washington DC (U.S.A.), to be determined by the Tribunal after consultation with the Parties before each hearing or meeting. Procedural Order No. 1 also includes a procedural calendar with two rounds of pleadings (4 months to each party for the first round and 3 months to each party for the second round, with an additional 1 month to SASL for a potential rejoinder on jurisdiction).  The Tribunal also limited the document production phase to approximately 5 months.

Based on the procedural calendar, SASL’s statement of claim and memorial on the merits was filed on time on September 24, 2014. On March 31, 2015, Bolivia filed its statement of defense and counter-memorial marking the conclusion of the preliminary written pleadings phase of the arbitration and the beginning of the document production phase. In accordance with the procedural calendar SASL’s reply to Bolivia’s statement of defense and counter-memorial was filed on November 30, 2015. Pursuant to extensions granted by the Tribunal to both parties, Bolivia’s rejoinder was filed on March 21, 2016 and SASL’s Rejoinder on jurisdiction was filed on May 3, 2016.

On April 30, 2015, after consultations with the parties, the Tribunal decided to postpone the oral hearing from May 2016 to July 2016. The oral hearing was held in Washington, D.C., on July 11 to July 21, 2016.  Pursuant to the procedural orders in place, both parties submitted post-hearing memorials on October 31, 2016, after which the Tribunal commenced the deliberation phase of the proceeding and will then issue a final award.

SASL seeks monetary compensation for damages in the amount of $385.7 million (NR 14-21, September 25, 2014), which includes $307.2 million for all of its losses caused by Bolivia’s breaches of the UK-Bolivia Treaty, plus $78.5 million in pre-award interest but excludes fees and costs incurred in connection with the arbitration proceeding. As an alternative, SASL had been seeking restitution of the Malku Khota project along with monetary damages for project-delay in the amount of $176.4 million, including pre-award interest, but after the second round of pleadings, SASL elected not to pursue its claim for restitution of the project itself along with the delay damages due to, among other things, the fact that restitution is rarely granted by tribunals (and even when it is, States are usually given the  option of paying current fair market value in lieu of restitution), the changes in the Bolivian mining law since the expropriation impose onerous conditions on foreign investors, and Bolivia’s conduct during the arbitration.

Orders of the Tribunal, including any awards, and pleadings (but not exhibits, witness statements or expert reports) are being posted on the Permanent Court of Arbitration’s website at www.pca-cpa.org.

Based on the procedural calendar included in Procedural Order No.1, as amended in April 2015, June 2015 and January 2016, and unless there is a negotiated settlement of the dispute, it is expected that any actual cash award, if there is one, would not be received sometime after the July 2016 hearing in Washington D.C.

The Company has Class B shares outstanding that entitle the holders collectively to 85% of the net cash, if any, (after deducting all costs, taxes and expenses and the third party funder’s portion thereof) received by TMI from an award or settlement in relation to SASL’s arbitration proceeding against the State of Bolivia for the expropriation of the Malku Khota project. The Class B shares carry redemption and retraction rights and rights on liquidation, are non-voting and non-participating in regards to dividends and on liquidation other than as described above.

On May 23, 2013, the Company entered into an agreement (the “Arbitration Costs Funding Agreement”) with a third party funder (the “Fund”) pursuant to which the Fund will cover most of SASL’s future costs and expenses related to its international arbitration proceedings against Bolivia. The Fund will not cover the salaries or travel expenses of the employees and executives of the Company when working on arbitration related matters. The non-brokered funding is on a non-recourse basis and includes costs and expenses of the enforcement of any award rendered by the Arbitral Tribunal. The Fund specializes in the funding of international arbitration proceedings and in providing assistance in connection with the enforcement of arbitration awards.

Under the terms of the privileged Arbitration Costs Funding Agreement, the Company has given certain warranties and covenants to the Fund and has provided security for its obligations. In consideration for the funding, SASL and the Company have agreed to pay to the Fund a portion of any recoveries received by SASL pursuant to the arbitration proceedings or any settlement with Bolivia. SASL continues to have control over the conduct of the international arbitration proceedings and to have the right to settle with Bolivia, discontinue proceedings, pursue the proceedings to trial and take any action it considers appropriate to enforce any resulting judgment or award.

A large majority of the costs of the arbitration to be incurred by SASL or the Company are payable only in the event there is an award in favour of SASL and will be paid out of the proceeds of any such award. These costs include certain fees and other expenses incurred in connection with the arbitration, including the Fund’s portion of any recoveries received pursuant to the arbitration proceedings or any settlement with Bolivia, the contingent success fee payable to SASL’s lead arbitration counsel and other commitments. These fees, costs and expenses will be paid out of any such award, thus potentially reducing funds received by SASL by as much as one-third of the amount of any award in its favour.

(1) Mineral resources for Malku Khota were estimated as of March 30, 2011 for the Preliminary Economic Assessment Update Technical Report for Malku Khota dated May 10, 2011 prepared by Allan Armitage, Ph.D., P.Geo., of GeoVector Management Inc. and filed on SEDAR on May 13, 2011.

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