United States Department of the Interior

OFFICE OF THE SOLICITOR

1849 STREET N.W.
WASHINGTON, DC 20240

 

M-37036 MAR 8 2015

Memorandum

To: Director, Bureau of Land Management

From: Solicitor

Subject: Twin Metals Minnesota Application to Renew Preference Right Leases 

01352 and 

The Bureau of Land Management (BLM) has asked whether it has the discretion to grant or deny
Twin Metals Minnesota?s pending application for renewal of two hardrock preference right
leases in northern Minnesota.I I conclude that Twin Metals Minnesota does not have a non-
discretionary right to renewal, but rather the BLM has discretion to grant or deny the pending
renewal application.

Background

On October 21, 2012, Twin Metals Minnesota (TMM) submitted an application to renew two
preference right leases (MNES-01352 and MN ES-01353) for lands that are located near the
southern boundary of the Boundary Waters Canoe Area Wilderness in northern Minnesota.2

The two leases at issue are located on acquired Weeks Act lands, as well as National Forest
System lands reserved from the public domain and managed by the United States Forest Service.
The Secretary?s authority, delegated to the BLM, for mineral disposition on the acquired lands is
in section 402 of Reorganization Plan No. 3 of 1946, 60 Stat. 1097, 1099?1100, and 16 U.S.C.

520, which governs mineral disposition on Weeks Act lands. The Secretary?s authority,
delegated to the BLM, for mineral disposition on reserved National Forest System lands in
Minnesota is in 16 U.S.C. 508b.

The BLM originally awarded the leases on June 1, 1966, for a primary term of twenty years, with
the possibility of three ten-year renewals.3 On May 14, 1986, the lessee timely applied for a
renewal.4 After receiving legal advice from the Of?ce of the Solicitor that the lease terms
allowed for a renewal, the BLM granted a renewal of the leases on July 1, 1989, for a period of

 

This memorandum does not address issues related to National Environmental Policy Act compliance or any other
legal issues surrounding these leases.

2 The Chippewa in Minnesota have hunting, ?shing, and other usufructuary rights in the northeast portion of the
state of Minnesota under the 1854 Treaty of LaPointe. Treaty with the Chippewa, 10 Stat. 1 109 (1854).

3 See 1966 leases 5.

4 The regulations at 43 C.F.R. 3522.1-1 (1985) state that renewal applications ?must be ?led in the appropriate
land of?ce within 90 days prior to the expiration of the lease term.? The lessee ?led an application for extension of
the term of the leases on May 14, l986?30 days before the end of the primary twenty-year term on June 14, 1986,
which was ?within 90 days? of the lease expiration. Consequently, the renewal application was timely filed.

ten years.5 TMM timely applied for a second renewal on March 15, 1999. The BLM renewed
the leases on January 1, 2004.6 The 2004 leases state that they are for a period of ten years,
?with preferential right in the lessee to renew for successive periods of 10 years under such terms
and conditions as may be prescribed by the Secretary of the Interior, unless otherwise provided
by law at the expiration of any period.? On October 21, 2012, TM timely applied to renew the
leases once more.7 TMM has been conducting exploration activities on the leaseholds based on
the 2004 leases while the BLM considers 2012 renewal application.

Under the original 1966 lease terms, as discussed more fully below, the lessee was required to
commence production within the twenty-year primary term to qualify for three renewals of right.
The leases provided that if there was no production at the end of the primary term, the leases
would end unless the Secretary granted a lease renewal to extend the time to commence
production.8

Although there has been no production, the operator held the leases under production waivers for
?ve years and then through payment of minimum royalties in lieu of production payments for the
rest of the time, consistent with the provisions of the 1966 leases that were incorporated by
reference in the 2004 leases. Those provisions stated that, beginning after the tenth year of the
primary term, the lessee is required to mine a quantity of minerals such that the royalties would
be equal to $5 per annum per acre for the primary term and $10 per annum per acre during each
renewal or, in lieu of that production, pay royalties equal to the minimum royalty. See 1966
leases 2(c) (incorporated into section 14 of the 2004 leases). Section 2(0) of the 1966 leases
allowed the lessor to waive, reduce, or suspend the minimum royalty payment for reasonable
periods of time in the interest of conservation or when such action does not adversely affect the
interest of the United States in accordance with 43 CPR. 3222.6-2. Id.

According to the records, the BLM relied on section 2(c) of the 1966 leases to grant
individual waivers of production and minimum royalties for each of the ?rst ?ve lease years
after the tenth year of the leases, beginning on June 1, 1976, and ending May 31, 1981, while the
State of Minnesota was conducting environmental studies on the proposed mining operations,

 

5 The three-year time period between the date on which the lessee ?led for the ?rst ten-year lease renewal and the
date on which the lease renewal was approved appears to have been due to consideration of the lessee?s
minimum royalty waiver request, coordination efforts between the United State Forest Service and the BLM
regarding the Forest Service approval for the renewals, and the consideration regarding the terms of the lease
renewal.
6 The lessee?s application for a second renewal on March 15, 1999 was 109 days before the end of the ?rst lease
renewal on July 1, 1999. The regulations in force in 1999 state that application for lease renewal shall be ?led
at least 90 days prior to the expiration of the lease term.? 43 C.F.R. 3528.1 (1998). Consequently, the 1999
renewal application was timely ?led. The time period between the lessee?s ?ling of the second renewal application
in March 1999 and the approval of the lease renewal in January 2004 appears to have been due to
coordination efforts between the United States Forest Service and the BLM, as well as the internal review
recess.

The 2012 renewal application was submitted 438 days before the end of the second renewal on January 1, 2014.
The timing requirements for ?ling a renewal application in the current regulations are the same as those in the
regulations that were in force in 1999. Id. 3511.27 (2015). Consequently, the 2012 application was timely ?led.

8 Section 5 of the 1966 leases contains de?nite conditions for allowing such an extension, in the interest of
conservation or upon a satisfactory showing by the lessee that the lease cannot be successfully operated at a pro?t or
for other reasons.

which prevented INCO Alloys International, Inc. predecessor in interest at the time of
waiver decision), from developing the leases.9

The BLM records show that IN CO ?led another production and minimum royalty waiver request
on June 26, 1985, for the period of July 1, 1981, to June 30, 1986. In response, the BLM issued
a decision on January 28, 1987, ?nding that Minnesota had completed its environmental studies
in 1979 and that INCO had not ?led any mining applications or royalty waiver applications since
1981. The decision stated that ?there is no evidence that INCO International is diligently
working towards the development of these leases.? Based on the conclusion that INCO
had not met the obligations of the leases, the agency denied the production and royalty waiver
request. The decision also noti?ed the lessee that all delinquent payments were due before the
BLM could process the ?rst lease renewals at that time.10 Although the records show
that INCO failed to timely pay the annual rentals and minimum royalties in lieu of production for
the lease years from June 1, 1981, to May 31, 1985 (a four-year period), once INCO received
notice from the BLM about the delinquency, INCO paid the fees for all four years.

Consequently, the royalty payment records of the Of?ce of Natural Resources Revenue (ONRR)
show that TMM and its predecessors paid the minimum royalties in lieu of production for each
of the delinquent years?1981 to 1985. The ONRR records also show that TMM paid the
minimum royalty in lieu of production payments from 1986 to the present.

In preparing to respond to the 1985 royalty waiver request, the BLM sought legal advice from
the Solicitor?s Of?ce, which led to a 1986 legal memorandum regarding the use of one of the
three renewals identi?ed in section 5 of the 1966 leases to extend the time to commence
production. This 1986 Associate Solicitor?s Opinion is discussed below in this memorandum.ll

As to the rental payments, the regulations in effect before 1986 provided that the ?rental paid for
any year shall be credited against any royalties for that year.? 43 C.F.R. (1985).
Beginning in 1999, the regulations have provided that the Minerals Management Service (now
ONRR) ?will credit your lease rental for any year against the ?rst production royalties or
minimum royalties . . . as the royalties accrue under the lease during that year.? Id. 3504.16(e)
(2014). The ONRR records show that TMM has paid the rentals and those payments have been
recouped for payment of a portion of the minimum royalty payments.

Relevant Lease Provisions

Three provisions in the 2004 leases are pertinent to whether TMM has a non-discretionary right
to renewal:

Part I. Lease Rights Granted:

This Lease Renewal entered into by and between the United States of America, through
the Bureau of Land Management, hereinafter called lessor, and American Copper 

 

9 These annual waivers, beginning in June 1976 and ending in May 1981, served to waive the production and
minimum royalty requirements of the leases for that time period. The noti?cation letters that BLM sent to the lessee
for each of these waivers state that a waiver of production and minimum royalty requirements is granted and do not
state that the lease term is being extended for the period of the suspension.

10 As noted above, the lessee applied for its ?rst lease renewal in May 1986. Under the 1966 lease terms, the
twenty-year primary term was due to expire in June 1986.

See infra p. 12.

Nickel Company, 922 19?h Street, Golden, Colorado, 80401, hereina?er called lessee, is
effective Jan-1 2004, for a period of 10 years, Sodium, Sulphur, Hardrock with
preferential right in the lessee to renew for successive periods of 10 years under such
terms and conditions as may be prescribed by the Secretary of the Interior, unless
otherwise provided by law at the expiration of any period.

Part 1, Section 2:

Lessor, in consideration of any bonuses, rents, and royalties to be paid, and the conditions
and covenants to be observed as herein set forth, hereby grants and leases to lessee the
exclusive right and privilege to explore for, drill for, mine, extract, remove, bene?ciate,
c0ncentrate, or otherwise process and dispose of the copper deposits nickel associated
minerals hereinafter referred to as ?leased deposits,? in, upon, or under the following
described lands: . . . .

Part II, Section 14. Special Stipulations:

The terms and conditions of the production royalties remains as stated in the attached
original lease agreement [referring to the 1966 lease].

The minimum annual production and minimum royalty is $10.00 per acre or a fraction
thereof as stated in the attached original lease agreement [referring to the 1966 lease].

Because the provisions of the 2004 leases govern for the reasons set forth below, the renewal
provisions of the 1966 leases are not applicable. Nevertheless, to provide a comprehensive
analysis, the renewal provisions of the 1966 leases are discussed in the analysis that follows.

The three relevant provisions in the 1966 leases are:
Introductory clause:

This lease entered into . . . between the United States of America, as Lessor,
through the Bureau of Land Management, and predecessor], as Lessee, pursuant
to the authority set out in, and subject to, Section 402 of the President?s Reorganization
Plan No. 3 of 1946, 60 Stat. 1099, and the Act of June 30, 1950, 64 Stat. 311, and to all
regulations of the Secretary of the Interior now in force when not inconsistent with any of
the provisions herein.

Section 

Rights of Lessee. In consideration of the rents and royalties to be paid and
conditions and covenants to be observed as herein set forth the Lessor grants to the
Lessee, subject to all privileges and uses heretofore duly authorized and prior valid
claims, the exclusive right to mine, remove, and dispose of all the copper and/or nickel
minerals and associated minerals . . . in, upon, or under [the described lands] . . . together
with the right to construct and maintain thereon such structures and other facilities as may
be necessary or convenient for the mining, preparation, and removal of said minerals, for
a period of twenty (20) years with a right in the Lessee to renew the same for successive

periods of ten (10) years each in accordance with regulation 43 C.F.R. 3221 and
the provisions of this lease.

Section 5:

Renewal Terms. The Lessor shall have the right to reasonably readjust and ?x royalties
payable hereunder at the end of the primary term of this lease and thereafter at the end of
each successive renewal thereof unless otherwise provided by the law at the time of the
expiration of any such period, and to readjust other terms and conditions of the lease,
including the revision of or imposition of stipulations for the protection of the surface of
the land as may be required by the agency having jurisdiction thereover; provided,
however, that the Lessee shall have the right to three successive ten?year renewals of this
lease with any readjustment in the royalties payable hereunder limited to that hereinafter
provided and with no readjustment of any of the other terms and conditions of this lease
unless at the end of the primary term of this lease the Lessee shall not have begun
production, either hereunder or under the companion lease granted to the Lessee this day.
The Secretary of the Interior may grant extensions of time for commencement of
production in the interest of conservation or upon a satisfactory showing by the Lessee
that the lease cannot be successfully operated at a profit or for other reasons, and the
Lessee shall be entitled to renewal as herein provided without readjustment except of
royalties payable hereunder if at the end of the primary or renewal period such an
extension shall be in effect, but the Lessee shall not be entitled to subsequent such
renewals unless it shall have begun production within the extended time. If the Lessee
shall be entitled to renewal without readjustment except of royalties payable hereunder,
the Secretary of the Interior may in his discretion increase the royalty rate prescribed in
subsection of Section 2 up to, but not exceeding 5% during the ?rst ten-year
renewal period, (ii) 6% during the second ten-year renewal period, and 7% during the
third ten-year renewal period. The extent of readjustment of royalty, if any to be made
under this section shall be determined prior to the commencement of the renewal period.

Analysis

The renewal rights of TMM are governed by the applicable provisions of leases MNES 01352
and MNES 01353. At this time, the 2004 renewal leases are in effect, and they use the 
standard renewal language that has been in place since the 19803. In particular, the 2004 lease
renewal terms grant the ?preferential right in the lessee to renew for successive periods of ten
years under such terms and conditions as may be prescribed by the Secretary of the Interior,
unless otherwise provided by law at the expiration of any period.? The Department has
consistently interpreted this provision as not entitling the lessee to an automatic right of renewal:
?This preferential right of renewal does not entitle the lessee to renewal of the lease but ?gives
the renewal lease applicant the legal right to be preferred against other parties, should the
Secretary, in the exercise of his discretion, decide to continue leasing.?? Gen. Chem. (Soda Ash)
Partners, 176 IBLA 1, 3 (2008) (emphasis in original) (quoting Sodium Lease Renewals, M-
36943, 89 Interior Dec. 173, 178 (1982) (1982 Solicitor?s Opinion)). The Interior Board of Land
Appeals (IBLA) noted further that the ?Secretary may exercise his discretionary authority in
renewing a lease in the same manner as in issuing an initial lease.? Id.

In reaching this conclusion, I have carefully considered contention that the terms of the
1966 leases govern and require the BLM to renew the leases for a third ten-year term. As
discussed below, I have concluded that the terms of the 2004 leases govern and that, in any
event, the renewal provisions of the 1966 leases give the BLM discretion regarding whether to
renew the leases.

The 2004 leases are each complete, integrated documents that contain all necessary lease terms
and are duly signed by the lessee and lessor. The degree to which the original 1966 leases
continue in effect are speci?cally described in the 2004 leases, with two special stipulations that
incorporate by reference only two provisions from the 1966 leases. 2004 leases 14. The ?rst
stipulation states that the ?terms and conditions of the production royalties remains as stated in
the attached original lease agreement.? The second states that the ?minimum annual production
and minimum royalty is $10.00 per acre or fraction thereof as stated in the attached original lease
agreement.? Neither of these imported provisions includes the lease renewal provisions of the
1966 leases. Consequently, since at least the time that the BLM and the lessee signed the 2004
lease renewals, the renewal provisions of the 1966 leases have no longer applied and the only
renewal terms are those described in the 2004 leases, as quoted in the previous paragraph. Based
on that well understood and unambiguous renewal language, the BLM has the same discretionary
authority in considering whether to renew the 2004 leases as it had in issuing the initial 1966
leases.

In a recent memorandum to me from legal counsel,?2 TMM asks the BLM to ignore the
plain renewal terms of the 2004 leases and instead apply the renewal provisions of the 1966
leases. TMM relies on extrinsic evidence, placing heavy reliance on the circumstances leading
up to the earlier 1989 renewal, which TMM asserts provide evidence that the BLM intended to
simply renew the leases under the exact same terms of the 1966 leases. TMM ?irther asserts that
the 2004 renewal, because it was executed using the same forms, must also have intended to
renew the 1966 leases without any change in terms.

As explained below in the discussion of the 1966 lease terms, the 1989 and 2004 renewals di??er
?'om each other because the discretion was limited in 1989 but not in 2004. In particular,
the 1989 renewal served as a one-time extension of time for commencement of production, as
authorized under section 5 of the 1966 leases. But section 5 also states that if an extension is
granted, the renewal must be on unaltered terms (other than royalty). Accordingly, under section 5
of the 1966 leases, the 1989 renewal was effectively a ten-year extension of the 1966 lease terms,
and the use of standard renewal forms in 1989 could have no effect other than to extend the leases
for ten years to allow for commencement of production. But because no production commenced
during that extension, TMM was not entitled to any subsequent production extensions or renewals
under the 1966 lease terms, so the BLM had discretion in 2004 over both whether to renew and the
terms of any such renewal. The executed renewal in 2004 therefore has operative effect, and the
plain language of the 2004 leases actually executed by the parties must be given effect. There is
nothing in the duly executed 2004 leases that states that the 1966 terms somehow govern over the
terms expressly set out in the 2004 leases.

 

'2 Memorandum ?'om 1. Daniel Colton, Partner, Dorsey Whitney LLP, received under a cover letter dated
January 26, 2016, to me ?om Kevin L. Baker, Director, Legal Affairs, Twin Metals Minnesota, LLC.

 reliance on extrinsic evidence to attempt to negate the 2004 lease terms does not comply
with the law of contracts. In the absence of ambiguity in the relevant lease provision, it is
improper to rely on extrinsic evidence. See Coast Fed. Bank, FSB v. United States, 323 F.3d
1035, 1040 (Fed. Cir. 2006) (en banc) (?If the provisions are clear and unambiguous, they must
be given their plain and ordinary meaning, and we may not resort to extrinsic evidence to
interpret them.? (internal quotation marks and citation omitted)); see also Shell Oil Co. v. United
States, 751 F.3d 1282, 1295 (Fed. Cir. 2014) (improper for government to rely on extrinsic
evidence when contract provision is unambiguous); Thoman v. Bureau of Land Mgmt. (on

recon. 155 IBLA 266, 267 (2001) (?If the contract language is clear and unambiguous, the
terms of the agreement are given plain meaning and the intent of the parties and the
interpretation of the agreement will be determined from the four comers of the document alone.?
(internal citations omitted)). Under this objective law of contracts, the subjective intent of the
parties is not relevant unless there is fraud, duress, or mutual mistake, none of which is alleged
by TMM. See Armenian Assembly of Am., Inc. v. Cafesjian, 758 F.3d 265, 278 (DC. Cir. 2014)
?objective? law of contracts . . . generally means that ?the written language embodying
the terms of an agreement will govern the rights and liabilities of the parties, [regardless] of the
intent of the parties at the time they entered into the contract, unless the written language is not
susceptible of a clear and de?nite undertaking, or unless there is fraud, duress, or mutual
mistake.? (alteration in original) (citations omitted)).

In this case, there is nothing ambiguous with the renewal provision contained in the 2004 leases:
there is no con?icting renewal provision referenced elsewhere in the 2004 leases and the
provision has a longstanding and well established meaning. While TMM has asserted that the
?preferential right? to renew is ambiguous because it is susceptible of more than one meaning,
that argument is without merit.13 TMM misinterprets the 1982 Solicitor?s Opinion, which held
that the preference right to renew ?gives the renewal lease applicant the legal right to be
preferred against other parties should the Secretary, in the proper exercise of his discretion,
decide to continue leasing.? 1982 Solicitor?s Opinion, 89 Interior Dec. at 178. In reaching this
conclusion, the Solicitor included a discussion of the meaning of ?preference right leases.? That
discussion focused on the rights gained in the initial leasing decision, and distinguished between
?entitlemen leases, which are leases to which an applicant is by statute entitled to receive if it
meets statutory criteria, and true ?preference right leases,? which are issued only if the Secretary
decides to lease. See id. Based on this discussion, TMM asserts it is ambiguous whether its
leases are entitlement leases or preference right leases. Even if this distinction altered renewal
rights, which is an issue that does not need to be addressed for purposes of this memorandum,
there is no ambiguity in this case. Neither of the statutory authorities under which the leases are
issued?section 402 of Reorganization Plan No. 3 of 1946, 60 Stat. 1097, 1099-1100, and 16
U.S.C. 508b?creates an entitlement to a lease or otherwise mandates the issuance of leases.
To the contrary, both authorities expressly condition leasing on surface owner consent (in this
instance the discretion of the Forest Service) and thus are discretionary. In short, there is no
ambiguity, and the renewal provisions in the 2004 leases provide the BLM with discretion to
decide whether to renew the leases.

 

'3 A lease is not ambiguous merely because the parties disagree on the correct interpretation. Thoman, 155 IBLA at
267 (citing Pollock v. Fed. Deposit Ins. Corp., l7 F.3d 798, 803 (5th Cir. 1994); Stichting May?ower Recreational
Fonds v. Newpark Res, Inc., 917 F.2d 1239, 1247(IOth Cir. 1990)).

Finally, even if the 1966 lease renewal terms were in effect, they do not prohibit the BLM from
exercising its discretion to decide whether to renew the leases. Section 1(a) of the 1966 leases
granted to the lessee ?the exclusive right to mine, remove, and dispose of all the copper and/or
nickel minerals and associated minerals . . . It also provided that renewal of the leases beyond
the primary term is subject to 43 C.F.R. 3221.4(0 (1966) and the provisions of the lease.
Section 3221 provides that the lessee ?will be granted a right of renewal for successive
periods, not exceeding 10 years each, under such reasonable terms and conditions as the
Secretary of the Interior may prescribe, including the revision of or imposition of stipulations for
the protection of the surface of the land as may be required by the agency having jurisdiction
thereover.? Based on this regulation, the BLM included a conditional renewal provision in
section 5 of the 1966 leases.

Section 5 of the 1966 leases describes both the conditions with which the lessee must comply to
establish a right to renew the lease and the limitations on revisions to the lease terms when the
lessee does have a right to renewal:

Renewal Terms. The Lessor shall have the right to reasonably readjust and ?x royalties
payable hereunder at the end of the primary term of this lease and therea?er at the end of
each successive renewal thereof unless otherwise provided by the law at the time of the
expiration of any such period, and to readjust other terms and conditions of the lease,
including the revision of or imposition of stipulations for the protection of the surface of
the land as may be required by the agency having jurisdiction thereover; provided,
however, that the Lessee shall have the right to three successive ten-year renewals of
this lease with any readjustment in the royalties payable hereunder limited to that
hereinafter provided and with no readjustment of any of the other terms and
conditions of this lease unless at the end of the primary term of this lease the Lessee
shall not have begun production, either hereunder or under the companion lease

granted to the Lessee this day. The Secretm of the Interior may grant extensions of time
for commencement of production in the interest of conservation or upon a satisfactog
showing by the Lessee that the lease cannot be successfully operated at a pro?t or for
other reasons, and the Lessee shall be entitled to renewal as herein provided Without
readjustment except of royalties payable hereunder if at the end of the prima_ry or renewal
period such an extension shall be in effect, but the Lessee shall not be entitled to

subsequent such renewals unless it shall have begun production within the extended time.
If the Lessee shall be entitled to renewal without readjustment except of royalties payable

hereunder, the Secretary of the Interior may in his discretion increase the royalty rate
prescribed in subsection of Section 2 up to, but not exceeding 5% during the ?rst
ten-year renewal period, (ii) 6% during the second ten-year renewal period, and 7%
during the third ten-year renewal period. The extent of readjustment of royalty, if any to
be made under this section shall be determined prior to the commencement of the renewal
period.

1966 leases 5 (emphases added). As explained more fully below, since at least 1986, the
Solicitor?s Of?ce has interpreted section 5 to mean that, even if the Secretary can and does, as a
matter of discretion, renew the lease to extend the time to commence production, there is no right

to a ?irther renewal when production14 has not begun at the end of the ?rst renewal-extension
period.

The opening segment of the ?rst sentence of section 5 describes the right to readjust the
royalties and other terms and conditions at the renewal stage. This provision means that, as a
general rule, if renewing the lease, the BLM is allowed to readjust not only the lease royalties but
also other terms and conditions at the renewal stage, including stipulations to protect the surface.

The second segment of the ?rst sentence following the semi-colon (highlighted in bold above) is
a proviso that allows for three successive ten-year renewals, but conditions the lessee?s right to
those renewals on the lessee beginning production before the end of the primary term of the
lease. The key conditioning language is at the end of the ?rst sentence, as highlighted below:

provided, however, that the Lessee shall have the right to three successive ten-year
renewals of this lease with any readjustment in royalties payable hereunder limited to that
hereina?er provided and with no readjustment of any of the other terms and conditions of
the lease unless at the end of the primary term of this lease the Lessee shall not have
begun production, either hereunder or under the companion lease granted to the
Lessee this day.

This highlighted clause, which begins with ?unless,? quali?es the very right to renew and not
merely, as the company has asserted, the phrase describing the level of discretion the BLM has to
readjust the other terms and conditions of the leases upon renewal. In other words, the proper
meaning of the proviso is clear when the last clause is placed next to the provision it actually
quali?es: ?[T]he Lessee shall have the right to three successive ten-year renewals of this lease .
. . unless at the end of the primary term of this lease the Lessee shall not have begun production,
either hereunder or under the companion lease granted to the Lessee this day.?

This conclusion is evident by the construction of the proviso. The two readjustment limitations
are tied together and modify the ?right to three successive ten-year renewals? language. The use
of the conjunctive ?and? between the two readjustment phrases (?with any readjustment in
royalties payable hereunder limited to that hereinafter provided and with no readjustment of any
of the other terms and conditions of the lease?) ties them together as a single modifier to the
right-to-renew language. Accordingly, the production requirement set out as the last clause of
the proviso cannot merely qualify the readjustment phrases, as contended by TMM, but must
apply to the overall right of renewal. In this way the proviso makes any non-discretionary
renewal contingent on the lessee meeting the production requirement ?rst, and then the
conditions of that renewal regarding royalties and lease terms are speci?ed in the readjustment
phrases.

This conclusion is further reinforced by the second sentence of section 5 (the portion of section 5
underlined above). That sentence has three clauses. The ?rst clause provides that the BLM has

 

'4 None of the Department?s solid minerals leasing regulations?including those in force at the time of the 1986
Solicitor?s Opinion, those promulgated immediately thereafter, and those currently in force?expressly define the
term ?production.? However, the rights granted in section 1 of the 1966 leases are described as mining, removing,
and disposing of the copper and/or nickel minerals and associated minerals in, upon, or under the leased lands.
These activities may be viewed to reasonably describe production. 

the discretion to grant the lessee an extension beyond the primary term to begin production, if
doing so would be in the interest of conservation or the lessee cannot operate the lease at a pro?t
or for other reasons. The second clause states that, if an extension is granted, the lessee is
entitled to a renewal in which the only revision allowed is to the royalties provision. These two
clauses allow the lessee to use the ?rst renewal as an extension time period to begin production.
The third and ?nal clause of the sentence, however, limits this right to a renewal if there is no
production by the end of the extension: ?but the Lessee shall not be entitled to subsequent such
renewals unless it shall have begun production within the extended time.? This ?nal clause
reinforces the preceding sentence?s condition precedent that there must be production before the
lessee has a ?right? to subsequent renewals. The second sentence therefore again makes
production a precondition for any right to renew and disallows the lessee from obtaining a
?right? to a renewal if no production has occurred during the primary term or an extension that
the Secretary may grant for commencement of production. 

The third sentence of section 5 (the portion of section 5 in italics above) describes the degree to
which the BLM may readjust the royalty if the lessee is entitled to a ?limited adjustment? lease
renewal under the ?rst sentence, the Lessee is ?entitled to renewal without readjustment
except of royalties payable hereunder . . . But without production, there would be no such
entitlement.

Taken as a whole, the language of section 5 does not give the lessee a non-discretionary right to
three successive renewals. Rather, production is the condition precedent for the lessee to obtain
any lease renewals of right. There is no right of renewal if there has been no production before
the end of the primary term or at the end of any renewal that the BLM grants to extend the time
for the lessee to commence production. The fact that the lease terms expressly state that
subsequent renewals of right are not available if no production occurs during any extension the
BLM may grant for commencement of production reiterates the linkage between renewals of
right and production. It would be incongruent to link only the bene?t of unchanged lease terms
to production, while leaving the lease renewal and royalty readjustment terms unaffected by a
lack of production. Such arbitrary line drawing would create little incentive for the lessee to
develop the minerals, which is the entire purpose for these mineral leases. In contrast, when
production is a condition precedent for lease renewals, the lease renewal provision effectively
serves as a minimal due diligence provision for the lessee.15

TMM asserts a different interpretation though. TMM reads the proviso of the ?rst sentence of
section 5 to grant the lessee a non-discretionary right of renewal, with such right of renewal
limited only to royalty readjustment and with no readjustment of any other lease terms. TMM
also reads the production requirement in the provision??unless at the end of the primary term of

 

'5 We note that section 14 of the 1966 leases does not change this conclusion. Section 14 sets forth the royalty rates
that would apply in the second ten years of the primary lease term and in the ?rst, second, and third ten-year renewal
periods, if the lessee were to sink a shaft for underground exploration or development or otherwise begin
commercial development within ?ve years of obtaining the rights and authorizations for construction, operation and
maintenance of the leased premises. According to TMM, in 1967, its predecessor in interest, INCO, sunk an 1100-
foot shaft for exploration and development on lease MNES 01352. TMM asserts that section 14 contractually
entitles it to these royalty rates during each of three renewal periods. However, nothing in section 14 provides for a
non-discretionary right of renewal. Rather, section 14 merely describes the royalty rate that would apply during the
?rst three ten-year renewals. It does not grant those renewals and does not state that sinking an exploration or
development shaft entitles the lessee to those renewals.

10

this lease the Lessee shall not have begun production??-to modify only the readjustment
limitation language, not the right to renewal language. Under interpretation of the
provision, if the lessee begins production within the primary term, the BLM may make only
limited royalty adjustments, as provided in the leases, and no adjustments to any other lease
terms. If, on the other hand, the lessee fails to begin production within the primary term,
according to TMM, the lack of production negates only the readjustment limitations in the
provision, and the BLM would be able to impose greater royalty readjustments and readjust other
terms and conditions of the leases upon renewal. In other words, under the company?s reading, a
right to three successive ten-year renewals begins immediately following the primary terms
regardless of whether production has occurred, and section 5 only affects the parameters for the
readjustment of the lease terms in those non-discretionary three renewals.

In addition to being unsupported by the terms of the proviso as described above, 
interpretation would allow it to hold the leases without any need to produce minerals in paying
quantities for at least ?fty years, and longer in this instance given the time to process the lease
renewals. This interpretation not only con?icts with the plain wording of the 1966 lease terms
but also is contrary to the very intent of the applicable statutory framework under which the
Secretary may authorize mineral development with an expectation of revenues, not speculative
land holdings. See Reorganization Plan No. 3 of 1946 402, 60 Stat. 1097, 1099-1100; 16
U.S.C. 520. Interpreting the leases to allow for three non-discretionary renewals covering a
thirty-year time span without the occurrence of the very underlying activity for which the leases
are issued in the ?rst place would defeat the purpose of entering into the lease. Such an
interpretation would allow for the speculative holding of mineral rights, which is contrary to
Congress?s intent to encourage productive mineral development while also providing a fair
return to the American taxpayer.

Our interpretation that section 5 requires the lessee to begin production to obtain the bene?t of
any non-discretionary right of renewal is not only mandated by the lease terms, but is consistent
with the regulation regarding renewal applications cited in the lease. Section 1(a) of the 1966
leases requires the renewals to be in accordance with 43 C.F.R. 3221 (1966), which in turn
requires that renewal applications ?must be ?led in a manner similar to that prescribed for
extension of a prospecting permit in Under 43 C.F.R. a prospector
must show that he or she has ?diligently performed prospecting activities? to support an
application for an extension of a prospecting permit.l6 Allowing for the difference between a
prospecting permit application and a lease renewal application, 3221.3(a) requires that the
lease renewal application include a showing of diligence in performing the lease activities (rather
than the prospecting activities), which are reasonably viewed, consistent with the rights granted
in section 1 of the lease terms, as mining, removing, and disposing of the copper and/or nickel
minerals and associated minerals?i.e., production. Consequently, by stating that any renewals
must be ?in accordance with 43 C.F.R. the lease terms again identi?ed production
as the baseline for obtaining a renewal of right. Based on the lease terms as a whole, and
because there has been no production during the primary term or the succeeding extensions
through lease renewals that the BLM has granted, TMM has not satis?ed the condition precedent

 

'6 Under 43 C.F.R. 3221.3(a) (1966), in addition to making a show of diligence, the applicant must ?le an
application in triplicate within ninety days before the expiration date of the lease term and must pay a ?ling fee.

11

fOr obtaining a renewal of right and, therefore, the BLM has discretion to make a decision
regarding whether to renew the leases even if the 1966 renewal terms were in e??ect.

In addition, the Solicitor?s Of?ce has already concluded that the BLM is not required to renew
the 1966 leases as a matter of right if there has been no production. In 1986, the Associate
Solicitor for the Division of Energy and Resources sent a memorandum to the Deputy State
Director for the BLM Eastern States Of?ce responding to three questions from the Deputy State
Director.17 The ?rst question was whether it was possible to grant lease renewals (for the same
leases that are at issue here) when the leases had never been in production. In response, the
Associate Solicitor examined the terms of the lease to determine whether or not lack of
production precludes extending the lease term. The Associate Solicitor then relied on the second
sentence of section 5 (the portion of section 5 underlined above) to conclude that, while the
leases may be extended for a period not exceeding ten years even though production has not
occurred, if production does not occur during the period of extension, ?no further extensions will
be allowed in accordance with the terms of the lease.? Consistent with this legal advice and the
provisions of section 5 of the 1966 leases, the BLM granted a ten-year extension by renewing
these two leases in 1989.

As noted above, the BLM also renewed the leases for a second ten-year period in 2004. Because
no production had occurred by that time, the decision to renew the leases in 2004 was
discretionary. The decision to renew the leases in 2004 does not impede the BLM from
again exercising discretion regarding the lessee?s application for a third renewal of the leases,
particularly where this of?ce has previously concluded that the agency need not allow additional
pre-production renewals. '8

It should be noted that the lessee?s payment of minimum royalties in lieu of production does not
alter the foregoing analysis. 19 The payment of minimum royalties is certainly one incentive to
produce that was imposed by the 1966 leases, but that incentive worked in tandem with the one
created by the leases? production precondition for mandatory renewals. The second incentive

 

?7 See Memorandum from Associate Solicitor, Energy and Resources, signed by Kenneth G. Lee, Assistant Solicitor,
Branch of Eastern Resources, to Deputy State Director, Mineral Resources, Eastern States Of?ce, Bureau of Land
Management, ?Application for Minimum Royalty Waiver Submitted by INCO Alloys International, Incorporated for
Leases ES 01352 and ES 01353? (Apr. 2, 1986) (Attached).

'8 TMM has made no showing in its pending renewal application under 43 C.F.R. 3221.4(t) (1966) that would
entitle it to a third and ?nal renewal under section 5 of the 1966 leases. TMM has never begun production. 
predecessor, INCO, sunk a development sha? and conducted bulk sampling, but neither of those actions quali?es as
beginning production. Without any showing of diligence in mining, removing, or disposing of the copper, nickel, and
associated minerals, and without beginning production, TMM is not entitled to any further non-discretionary ten-year
renewals. TMM has also asserted that the Department of the Interior is prohibited by 30 U.S.C. l84(h)(2), as well
as the Department?s regulations at 43 C.F.R. 3514.40 (2015), from ?cancelling? interest in the leases at
issue as TMM is a bona ?de purchaser. But the cancellation regulations have no applicability where, as here, the
decision is whether to renew a lease. Were BLM to exercise its discretion to deny the lease renewal application, it
would not be cancelling the leases, as contemplated by 30 U.S.C. l84(h)(2) and 43 C.F.R. 3514.40, but rather
would be allowing leases that have been in existence for years without production to terminate by their own
terms.

'9 The original leases do not mention minimum royalties as a way to ful?ll the production requirement. And section
2(b) of 2004 leases merely provides that the request of the lessee, made prior to initiation of the lease
year, the authorized of?cer may allow in writing the payment of a $3.00 per acre or ?action thereof minimum
royalty in lieu of production for any particular lease year.?

12

expired when no production occurred by the end of the extension period granted by the 1989
renewal. While the 2004 renewal leases retain the minimum royalties payment incentive, that
fact has no impact on the renewal provision of the 2004 leases. Of course, for the leases to
continue in effect during the renewal period, the lessee was required to continue to meet its
obligation to pay royalties in lieu of production. However, that payment was and is not
equivalent to production and does not somehow entitle the lessee to obtain a lease renewal of
right; instead, it merely keeps the leases from terminating during the extension time period the
BLM has granted through a lease renewal.

The fact that the payment of royalties in lieu of production cannot be the basis for establishing
the right to renew, and cannot be a defacto means of extending a lease in perpetuity, is also clear
from IBLA case law. In General Chemical (Soda Ash) Partners, the IBLA held that minimum
royalties in lieu of production have ?nothing to do with whether the Secretary, in looking at
production from the mine of which the lease is a part at the end of the current lease term, will
renew the lease for an additional term.? 176 IBLA at 9. The Board further held, ?Moreover,
?[t]he Secretary has the authority to encourage production and development of federally leased
sodium resources both through minimum development and production requirements and
minimum royalties imposed on each lease.? Id. (emphasis in original) (quoting 1982 Solicitor?s
Opinion, 89 Interior Dec. at 185). The leases here use precisely both mechanisms to encourage
production, albeit not successfully in this instance.

Conclusion

For the foregoing reasons, the lessee has not established a non-discretionary right to a third ten-
year renewal. Under the governing 2004 lease terms, the BLM has the same discretion regarding
whether to renew the lease for a third time as it had in determining whether to grant the initial
lease. While the 2004 lease terms give the lessee a preference over other potential lessees to
lease the lands in question, they do not entitle the lessee to non-discretionary renewal of the



Attachment

13

United States Department of the Interior

OFFICE OF THE SOLICITOR
350 South Pickett Street
ALEXANDRIA. VIRGINIA 22304
BLM.ER.0335 3.



 

Memorandum

To: Deputy State Director, Mineral Resources (970)
Eastern States Office, Bureau of Land Management

From: Associate Solicitor, Energy and Resources

Subject: Application for Minimum Royalty Waiver Submitted by
INCO Alloys International, Incorporated for Leases
ES 01352 and ES 01353

You have requested a legal opinion addressing three questions
raised in a memorandum from the Milwaukee District Office. The
answers along with these questions are set forth below. -

Question No. 1: "Is it possible to grant lease renewals for
these leases when the leases have never been in production? The
lease documents and the regulations are not clear on this point.
This question will surely be asked by INCO since the initial

20 year lease term expires on May 31, 1986."

 

A lease for hardrock minerals may be issued for a period not ex-
ceeding 20 years. The primary term on the subject leases was for
a 20 year period. The lease shall be subject to a preferential
right to renew for a term not to exceed 10 years at the end of
the initial term and each succeeding term thereafter, upon such
terms and conditions as may be incorporated in each lease or
prescribed in the general regulations issued by the Secretary.

43 C.F.R. The Secretary of the Interior has
promulgated no regulations that require production as a prereq-
uisite to the extension of such leases. Accordingly, we must
look to the terms of the lease to determine whether or not lack
of production precludes extending the lease term. Section 5 of
the lease states that, "The Secretary of the Interior may grant
extensions of time for commencement of production in the interest
of conservation or upon a satisfactory showing by the lessee that
the lease cannot be successfully Operated at a profit or for
other reasons . . . but the lessee shall not be entitled to
subsequent such renewals unless it shall have begun production
within the extended time." Therefore, according to the terms

of the lease, such lease may be extended even though production
has not occurred, for a period not exceeding 10 years. If
production does not occur during the period of extension, no
further extensions will be allowed in accordance with the terms
of the lease.

Question No. 2: has been given waivers of minimum royalty
payments for 5 years due to condition beyond its control 

 

 

 



-2-

enyironmental analysis), and is now asking for a waiver based
on additional conditions beyond its control low copper
and nickel prices). Has BLM set a binding precedence [sic] by
granting the original waivers?"

INCO's failure to pay minimum royalties as set forth in section
2(c) of the lease, constitutes a breach of the covenants and
conditions contained in the lease agreement. In section 6(b)

of the lease, the United States reserved the right to waive any
breach of the covenants and conditions contained therein but any
such waiver shall extend only to the particular breach so waived
and shall not limit the rights of the lessor with respect to any
future breach. Therefore, waiver of a prior breach of the
minimum royalty payments, does not obligate the Bureau to grant
any subsequent waivers.

Question No. 3: Section 2(c) of the lease states, "Lessee [sic]
may . . . waive . . . minimum royalty payments for reasonable
periods of time . . . .u Waivers were given for the first

5 years they were due, which is one?fourth of the initial lease
term. WOuld granting of further waivers be conceived to extend
beyond a "reasonable period?"

Section 2(c) states that, "Lessor may in its discretion, waive,
reduce, or suspend the minimum royalty payment for reasonable
periods of time in the interest of conservation or when such
action does not adversely affect the interest of the United
States. . . Whether or not the waiver period is ?reasonable?
must be determined by an examination of the purpose for which
such discretion was exercised. Obviously if the reason for such
waiver was due to a condition that only existed for 3 years, then
a waiver of minimum royalty for a 10 year period would probably
be deemed unreasonable. we suggest that the information submitted
by the lessee be examined and considered in its entirety in order
to determine what is reasonable given the facts set forth in that
information. In addition, the reasonable period of time is to be
viewed in the context of the "interest of conservation" and the
"interest of the United States."

If you should have any further questions relating to this matter,
please contact Barry Crowell at 274-0204.

6

Ken G. Lee
Assistant Solicitor
Branch of Eastern Resources

Attachment