Saturday, May 3, 2014

Want to Sell a Mining Property? Due Diligence


Want to Sell a Mining Property? Due Diligence

In this post I will provide some guidance as to the issue: what to expect from the Buyer side – when they receive you offer to buy a mining property.
As we usually buy something, we, as a rule, perform some sort of investigation before this. This is very true for everything, especially business. In business transactions, this sort of investigation is normally referred to as Due Diligence.  This term originated in the USA in section 11(b)(3) of the Securities Act of 1933. Since this year evaluation process, related to various transactions, in the USA has been termed ‘due diligence ’. Mostly it includes:
  • investigation into the acquisition of a company or assets in a commercial context;
  • risk analysis in financing;
  • general pre-contractual enquiries.
Investopedia defines: Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer’s ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
There is tons of information on the Web, regarding Due Diligence – some of links are provided at the end of this post. For mining industry — John T. Boyd – one of the leading world experts in mining has the following definition at their Web-site: “Mining Due Diligence Definition: appropriate level of study by knowledgeable professionals to identify and assess significant factors affecting the future operation of the subject mining property.” Due Diligence is required and conducted no matter at what stage the mineral property is: prospecting, exploration, resource definition, reserve estimation, development, production or reclamation.
Due Diligence is the assessment of a project/company undertaken by a potential purchaser. The results of this assessment are used to assess project risk profile, value the asset and decide the purchase price. The following graph represents some of the typical issues:

When you are selling Exploration Project or Joint Venture Partnership – as the rule the Due Diligence Process is focused on identification of exploration potential or “blue sky” of the property or properties being sold. Of course, one of the major elements is the site visit; however, in some cases this is not implemented. The due diligence expert usually has a good expertise and exploration experience in the type of deposits; and his effort results in identifying both the positive and negative aspects of the property to be sold. Prior to commencement of on-site due diligence a legal review is conducted to ensure that the property can be acquired and that the acquisition will not trigger any first right of refusal issues.
In case of Producing Properties a big team might be involved in Due Diligence – the one that consists of professionals from geological, mining, metallurgical and environmental disciplines. All contracts for all aspects of the mine operations shall be reviewed, including but not limited to permits, sales or hedging contracts and union and employee contracts. The team shall make a site visit to evaluate the current condition of the assets to be sold; both the physical assets as well as the personnel involved in operations. The following particular issues may be investigated: the existing reserves within the mine; any modifications that can be implemented immediately to reduce costs or improve recoveries; possibility of expanding the reserves with near-mine exploration; mine infrastructure and equipment may be evaluated and valued as part of the due diligence process.
So, basically this concludes my short overview of Due Diligence as a part of selling the mine process. More detailed information may be found on the following links:
Google Books provide two very useful sources:
The Due Diligence Handbook by Linda S. Spedding
Due diligence: the critical stage in mergers and acquisitions By Peter Howson
A very good example: Case Study in Due Diligence – Southern Arc Minerals . In this particular case the following areas were examined: management; geologists; company strategy; geopolitics; right to exploit; disclosure of technical data and assay results; valuation of resources; risks and assumptions
Due Diligence Checklist
Mining Investors. Understanding the legal structure of a mining company and identifying its management, shareholders and relationship with the financial markets. By MiningWatch Canada
Overview of mineral property appraising
Due Diligence Reviews: Assessing Effective Acquisitions by Gilles Arseneau, Ph.D., P.Geo
The Checklist for Mining Due Diligence is provided in this article: Independent Engineer / Due Diligence Reviews
Due Diligence in Mining at Infomine
OECD Pilot Project in the Mining Sector: Promoting Responsible Investment through Enhanced Due Diligence
DUE-DILIGENCE REVIEW AN ESSENTIAL PART OF PROJECT FINANCE Pincock, Allen & Holt (PAH) is a consulting and engineering firm serving the international mineral resource industry


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