Due Diligence in Mining Projects

Every business endeavor carries some risk, and the astute businessman, over time, develops a sense of the kinds of risk presented by a business proposition, and a set of strategies designed to deal with those risks. Mining anywhere in the world has its own particular set of risks, in the form of commodity prices, engineering puzzles, and geologic uncertainty. When a company pursues mining on a global scale, additional risks arise, and things like political risk and currency risk come to the fore. Thus, a thorough due diligence effort prior to or part of a transaction or project diminishes risk by diminishing uncertainty. Once a risk is revealed during due diligence, a mining company can adopt a strategy to manage the risk, or try to shift it elsewhere (Adapted from Anderson, 2000).

NIckel

Figure 1: Processing plant for nickel

Due diligence studies for mining projects are often required for validating the feasibility of a new or expanding mine. It is also performed for financing, loans, participation by others, or acquisition of a property or company by another firm. The steps involved are similar to those taken in project feasibility studies. The process involves a set of multi-disciplinary activities aiming to make the right decision given the events and timing.

“…a prudent owner before he buys shares, ought to go to the mine and carefully examine the nature of the vein, for it is very important that he should be on his guard lest fraudulent sellers of shares should deceive him…” Georgius Agricola (1556).

Due diligence process can be tailored for specific scope and complexity. Each party must choose the type of due diligence suitable for its needs.  Types and level of due diligence includes desktop review, technical audit and full due diligence with several site visits and check testing.

The first step in a due-diligence review is to ensure critical data are reviewed properly. The key areas to be considered:

  • Geology and Mineral Resources
  • Mine Planning and Mineral Reserves
  • Mine Operations
  • Processing
  • Lands and Legal requirements
  • Environmental Evaluation and Permitting
  • Infrastructure and Administration
  • Project Schedule
  • Market conditions
  • Economics
Sald Mine.png

Figure 2: Underground mine -Salt extraction 

All mining projects have risk components of varying degrees. The major components of risk include technical factors, environmental aspects, market and financial factors and political factors. Tolerance for risk is dependent on the size of the parent company and the financial and business approach to the project.

Some of the typical risks involving mining projects include ownership and control of land rights, and the ability of the mining company to control its property related assets, level and extent of the geological understanding on the property associated with consistency and homogeneity, ability to economically extract the mineral/material from the ore body, ability to economically recover and process the mineral/material from the ore, public and private infrastructure requirements of the project, ability to supply product consistently according to the market requirements, specifications  the required  demand, foreign trade, price, substitution and market volatility, risk associated with the performance of the management team, risk associated with capital and operational cost, risks associated with temporary and permanent environmental impacts that will be caused by the operation, including environmental restrictions,  regulations and community relations (Adapted from bullock, 2011).

Besides the exclusively technical site specific issues previously discussed, Bickham and Marsh (2015) pointed out seven most common pitfalls in company approaches to assessing political and stakeholder challenges, among them lack of understanding about relationships or rivalries between stakeholders, failing to anticipate political shifts and poor relationships inherited from previous owners.

Protest

Figure 3: Protest against mining operations

Rio Tinto acquired Alcan for about US$40 billion in 2007. Was this a good decision? What can you say about the due diligence performed before the acquisition?

http://www.mining.com/the-worst-mining-deal-ever-rio-tinto-buying-alcan-for-38-1b-37600/

Kind regards,

Ronaldo

Follow me on twitter @rcrdossantos

References:

Bickham, E. and Marsh, S. “‘Before it hits the fan’: getting mining deal due diligence right”, Mineweb. (July, 2015). Last accessed on 07/03/2016 at http://www.mineweb.com/articles-by-type/analysis/before-it-hits-the-fan-getting-mining-deal-due-diligence-right/

Anderson, S. W. “Identifying and Managing Risk in International Mining Projects”, Davis Graham & Stubbs LLP, National Western Mining Conference November 2000. (November, 2000). Last accessed on 07/03/2016 at http://www.dgslaw.com/images/materials/325724.PDF

Agricola, G., “De re metallica”, Dover Publications, Translation by Hover, H., New York, NY – US, (1950).

Lawrie, R. L.., “Mining Reference Handbook”, Society for Mining, Metallurgy, and Exploration, Inc, Denver, CO – US (2002).

Bullock, R. L., “Notes on Mining Property Feasibility Studies & Evaluation Procedures (Mi Eng 409)”, Missouri University of Science and Technology, Rolla, MO, USA. (February, 2011).

 

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