Termination of mining operations

The performance of the mining contracts of Calenturitas and La Jagua was seriously impacted since 2020 as the result of a number of technical, economic and legal circumstances which rendered an extremely adverse valuation of the mining project in terms of net present value and cash flow. In this context, continuing the performance of the mining contracts was not viable considering the substantial capital investment that would be required to continue the mining project execution. 

The technical, economic and legal circumstances referred to above include, among others, the following:

1.  The suspension of obligations under the mining contracts for Force Majeure 

The  mining operations in Calenturitas and La Jagua mines were temporarily suspended since 24 March 2020, in the frame of the mandatory precautionary isolation ordered by the National Government and as a result of the opposition posed by the competent authority and communities of our area of influence in the Cesar department for us to continue our operation despite them being included as exceptions to the mandatory isolation measures set out by the National Government. In such scenario it was not possible to guarantee that operations could be resumed in safe conditions. 

That circumstance was informed to ANM which further thereto accepted the suspension of obligations under the mining contracts due to force majeure under article 52 of the Mine Code, for the term of duration of the mandatory precautionary isolation decreed upon the public health emergency and extending the effects thereof to renewals or changes. 

The circumstances that gave rise to the suspension for force majeure remained until 31 August 2020, until which date the mandatory precautionary isolation measures decreed by the National Government were in effect under Decree 1076 of 28 July 2020.

2.  Suspension of activities under the mining contracts for technical and economic reasons  

On 3 July 2020, the Prodeco’s Group companies submitted to ANM a request for temporary suspension of Calenturitas and La Jagua mining operations (the Request of Suspension) under article 54 of the Mine Code that provides for the ability to temporarily suspending activities under mining contracts whenever technical and economic circumstances arise that temporarily prevent continuing the execution of the operations.

The Request of Suspension was submitted taking into account that the review of  the mining plans for Calenturitas and La Jagua mines, in the context of the coal market worsened by the effects of the Covid-19 global pandemic, resulted in the identification of high-impact technical and economic circumstances which would prevent the Prodeco Group to resume its mining operations upon overcoming the circumstances that caused the suspension of obligations for force majeure under the mining contracts. 

The situation was the subject of several meetings held with the ANM where the variables and aspects that affected from the economic and geotechnical perspectives the feasibility of Calenturitas and La Jagua mines were explained in detail and their impact in terms of both cash flow and net present value of the mining operations.  

3.  The request of changes to long term PTIs 

In line with the alternatives set out in the Request of Suspension, on 23 July 2020 the Prodeco Group submitted to ANM for consideration a new updated long-term program of works and investments (PTI LOM 2020) for Calenturitas and La Jagua mines, aimed to optimize as much as possible the existing mining plans, achieve operational efficiencies and reduce costs with the purpose of enhancing the operating and economic feasibility of the projects. The proposed long term PTI 2020 was contingent to the approval of the Request of Suspension insofar as both documents were interconnected. 

Considering that ANM did not agree to the Request of Suspension, the Prodeco Group in communications dated 28 December 2020 withdrew from the assessment requested in connection with the PTI LOM 2020 as in the absence of the approval requested, the implementation of said mining plans was rendered unfeasible. 

4.  ANM’s decision on the Request of Suspension

On 18 August 2020, ANM rejected the Request of Suspension considering amongst others the following grounds:

• Based on the provisions of article 45 of the Mine Code, ANM considered that the contracts were entered into by the mining title holder at its own risk, and pursuant to article 56 of same Mine Code, the ANM was not bound to any remediation obligation to the concessionaire.
• Although the ANM pointed out in its ruling that the Request of Suspension met the criteria defined in article 54 of the Mine Code, in its opinion it was not demonstrated that the mining operation performance was prevented for factors such as the coal price, coal demand in international markets or in general the variables presented by the mining title holder.

5.  The reconsideration appeal (recurso de reposición) brought against ANM’s ruling denying the Request of Suspension

On 1 September 2020 the Prodeco Group filed a reconsideration appeal (the Recourse) against the ANM's initial decisions on the grounds that the Calenturitas and La Jagua mines situation met all the criteria for the temporary suspension of activities under the Mining Contract for technical or economic reasons, in the terms of article 54 of the Mine Code. 

Particularly, the Recourse stated that the suspension of activities dealt with in Article 54 of the Mining Code was an alternative provided by that law upon request of the mining title holder with the aim to allow it to pause with due cause the execution of certain mining activities in face of transitory technical or economic circumstances not constituting force majeure which would prevent or impair the performance of those activities. 

In addition it was pointed out that in a scenario of absence of authorization for temporary suspension of activities, the only options available to the Prodeco Group under the mining contracts would be: (i) resuming the mining activities and thereby being responsible for “bearing” the adverse effects that arise from the economic situation of the thermal coal world market to avoid the commencement of a caducity procedure against the Prodeco Group for wrongful suspension of the mining activities or (ii) to relinquish the mining contracts and thereby lose all the financial investments made by the Prodeco Group for the satisfactory execution of the project.

It was also stated that as per articles 59  and 84  of Decree 2655 of 1988, the fact of bearing the risk of the mining operation did not entail that the mining contractor was bound to exploit in a scenario of losses, when this result had been caused by a market situation which was proved and due to subsequent facts beyond the contractor’s control, as the case in question. 

6.  Ruling of the Recourse that declined the Request of Suspension

On 18 December 2020, ANM ruled to confirm, and accordingly not to reverse, the decision to deny the request of suspension initially adopted on 18 August 2020.

ANM reasoned their decision mostly on the fact that due to the conditions of the international coal markets, the impact of coal price reduction constituted a circumstance that could not be deemed temporary but a long-term condition, and therefore it was not feasible to authorize a “suspension of operations indefinitely to wait for uncertain price increases.”  

In addition, further to the evaluation of the operations' economic conditions, ANM deemed that the business cost management was capable to be improved. Regarding the risk borne by the concessionaire under a mining contract, ANM stated “that the concept “on the mining title holder’s own risk” is not an unlimited concept nor does it imply in any way that the mining title holder should perform the concession contract up to the completion thereof without concerning about the results, because just as we have observed, there are three legal recourses: (i) the force majeure, which as a mechanism suspends the enforceability of the obligations by itself; (ii) the suspension of mining activities or operations, the one and the other in transitory conditions and therefore surmountable, and (iii) the relinquishment of the contract.” (underlying out of the text)

7.  Subsequent activities to ANM’s final decision on the Request of Suspension – Mining plans review

Further to conversations held with ANM upon being served on the decision to not concede the Request of Suspension, it was determined that the Prodeco Group could start an evaluation of their economic reserves of coal based on the revision of the mining project economic assumptions in the terms set forth by ANM. 

In the case that such review of the reserves was feasible for the Prodeco Group and acceptable for ANM, the Prodeco Group would then carry out the reconfiguration of its mining plans based on the enhancements to the economic conditions. These plans would be based on the definitions made with ANM for later submission of the revised Program of Works and Investments (PTIs) to ANM for approval.

Further to the foregoing, on 28 December 2020 the Prodeco Group requested ANM to be granted, until 30 March 2021, time for reviewing the operation costs and for redefining Calenturitas and La Jagua mine's short- and long-term mining plan. 

8.  Calenturitas and la Jagua mines projects unfeasibility – Relinquishment of the mining contracts

In January 2021 the Prodeco Group conducted the required technical, economic and operational analyses on the current project status in order to assess the feasibility thereof in the short, middle and long terms. 

To this end, the Prodeco Group conducted the evaluation of several alternatives of mining plans aimed to determine the project feasibility based on the macroeconomic assumptions that would allow to make it financially feasible.

The assessment rendered the conclusion that in the conditions at that time it was not feasible for the Prodeco Group to carry on performing the mining projects of Calenturitas and La Jagua mines, considering that amongst other reasons, the negative net present value and the projected cash flow of the mining projects, a circumstance that would demand quite significant efforts in terms of investments and resources for funding the restarting and performance of operations, which neither the Prodeco Group nor its shareholders would be able to undertake. 

Accordingly, based on the applicable provisions of the mining contracts and on article 23 of Decree 2655 of 1988 , the Prodeco's Group shareholders reached the decision to not continue performing the mining projects despite the substantial investments they made to execute the project as initially planned under other circumstances and in spite of the efforts made to find other feasible options.  

On 4 February 2021 the Prodeco Group formally presented to the ANM the relinquishment to the mining contracts of Calenturitas and La Jagua mines.  

ANM's final approval to the mining contracts relinquishment was necessary to formalize the definitive termination of the mining contracts. The ANM issued the following decisions after reviewing the relinquishment of the mining contracts submitted by the Prodeco Group: 

1. On 6 April 2021, the ANM notified CDJ that it had rejected the relinquishment of two of its three mining contracts related to the operation of the La Jagua Mine, specifically CDJ’s Contracts HKT-08031 and DKP-141. CDJ filed administrative remedies (“recursos de reposición y apelación”) against the resolutions that rejected the relinquishment of those contracts. However, on 5 August 2021, the ANM rejected the administrative remedies, thus confirming its initial decisions. As a result, CDJ’s Contracts HKT-08031 and DKP-141 remained in force.  On 14 March 2024 CDJ’s Contracts HKT-08031 and DKP-141 were terminated by mutual agreement with ANM. This decision was made considering the liquidation of the mining Prodeco’s Mining Contract, CMU’s Mining Contract and, CDJ’s Contract 285/95 in 2023 and also that CDJ’s Contracts HKT-08031 and DKP-141 do not have any more economically-exploitable resources.
2. Additionally, on 4 May 2021, the ANM notified Prodeco, CMU and CDJ that it had rejected the relinquishment of Prodeco’s Mining Contract, CMU’s Mining Contract and, CDJ’s Contract 285/95. The ANM argued that, although Prodeco, CMU and CDJ were entitled to relinquish these mining contracts at any time, they had not submitted enough evidence for the ANM to determine the maintenance and conservation condition of the mining infrastructure. On 18 May 2021, Prodeco, CMU and CDJ filed administrative remedies (“recursos de reposición”) against the resolutions that rejected the relinquishment of their mining contracts. 
3. After several communications sent by Prodeco, CMU and CDJ, ANM’s technical visits to the Calenturitas and La Jagua mines and joint working groups, on 3 September 2021, Prodeco, CMU and CDJ were notified of the ANM’s Resolutions accepting the relinquishment of Prodeco’s Mining Contract, CMU’s Mining Contract and CDJ’s Contract 285/95.

As a result of the termination of the mining contracts of Calenturitas and la Jagua mines pursuant to the National Mining Agency (ANM) acceptance to the mining contracts' relinquishment on 3 September 2021, the Prodeco Group's mining operations in the Department of Cesar have been definitively terminated.

Liquidation of the mining contracts comprises, among others, ANM's verification that mining areas (deposits) are in operational conditions to be delivered as required under the mining contracts, receipt by ANM of such deposits, definition of assets to be reverted and verification of their condition, and verification of compliance with economic, social and labour obligations by the companies. 

The liquidation of Prodeco's Mining Contract, CMU's Mining Contract and, CDJ's Contract 285/was finalized on 5 September/23, 26 September/23 and 1 December /23 respectively. Following the above, the mining areas were handed back in an operational condition and declared received by the National Mining Agency (ANM). 

From the moment the Prodeco's Group operations were suspended in 2020 and later definitively terminated in 2021, the Prodeco Group fulfilled its care and maintenance (C&M) obligations under the mining contracts, which were required to keep the mining areas in operational condition until the date in which the mining contracts were liquidated, and the mining areas were handed over to the ANM. 

As a result of the mining contracts liquidation, C&M obligations under the mining contracts to maintain the mining areas in operational condition were terminated, without prejudice to the Prodeco's Group obligation to continue complying with their environmental obligations under the Environmental Management Plans for Calenturitas and La Jagua mines. 

Regarding assets subject to reversion, the Prodeco Group agreed with ANM on the final list of assets to be reverted and this process is expected to be completed by December 2024. After this date, ANM will assume all responsibility for such assets.

Following the termination of the Prodeco's Group mining operations in Cesar by March 2020, we have been performing care and maintenance activities on the mining infrastructure, from both the mining and environmental perspectives, fully complying with its contractual and legal obligations. 

From an environmental perspective, the Prodeco Group has been working with the National Agency of Environmental Licenses (ANLA) in the definition of the environmental and social plan to be carried out in furtherance of the termination of the Prodeco's Group mining operations in the region of Cesar, which includes the definition of both fulfilled and outstanding environmental and social obligations. These will form part of the Environmental Closure Plan, which will set out the environmental obligations the Prodeco Group is responsible for and the terms under which such obligations will be fulfilled. 

The Prodeco Group continue to endeavor to comply with commitments in the post-mining resettlement and social transition process. 

Company has been working to identify economic and labor alternatives as its contribution to help the Cesar department in a proper social and economic transition process. 

Proactive engagement with the community, government, and other regional and national relevant stakeholders in the implementation of socio-economic development programmes has been key to supporting a process of transition and productive reconversion. 

The Grupo Prodeco has continued to comply with the community resettlement obligations, seeking improvements in the quality of life of the communities. 
 

The Prodeco Group has fully complied with its legal obligations for its employees.  This includes paying salaries and benefits to employees that have not participated in work activities for over four years. It also offered employees a generous voluntary retirement plan that largely exceeded the defined legal and industry labor termination packages. 

In addition, the Prodeco Group has also provided a range of support to workers who have left the company, through counseling and professional support program aimed at identifying occupational life projects. 

This program is promoted through the Center for Entrepreneurship and Employability – Cemprende, that has enabled a significant number of people to establish small enterprise that are now generating income and creating employment in the region.