Things To Check Before Buying A Mining Project – Due Diligence
It appears after a few years of sitting in the doldrums – mining is having an upswing. Yeah boy…lets go buy some projects, oh and I need plant and some earth moving gear. Simple right…Or as they say – buyer beware- the devil is in the detail. Do your due diligence.
Why Perform a Due Diligence before buying a Mine Site
Performing a due diligence study can help potential buyers to establish the most likely business case and to identify and understand the risks and opportunities which surround that case.
A Due Diligence study may provide confirmation that the directors of the potential lending or purchasing (or divesting) entity have exercised technical due diligence in the performance of their duties.
Stages of Due Diligence
For the mining industry, a Due Diligence report is a detailed review usually in connection with:
- Purchase or sale of a mineral property;
- Approval of a large capital expenditure; or
- Borrowing of a large sum of money
There are typically three stages to a due diligence;
- Preliminary review of technical data, procedures, parameters and results.
- Technical Due Diligence (sometimes referred to as a Technical Audit).
- Due Diligence Extension Report.
Stage 1 – Preliminary review of technical data, procedures, parameters and results
This is performed to:
- Determine the quality and reliability of matters of a technical nature;
- To facilitate a more detailed technical audit; and,
- To identify and highlight those specific technical matters which might pose a high risk to the project and issue recommendations to mitigate the risk.
The level of work undertaken depends on the situation and the client’s requirements, and ranges from a high level review of descriptions of data and procedures contained in documents provided, with no site visit (i.e. a “desktop review”), to a thorough and detailed review of procedures, data and results coupled with a site visit.
Stage 2 – Technical Due Diligence
Technical due diligence would normally be joined with commercial and financial due diligence (foreign exchange, tax, debt versus equity, price, market, country risk), as well as legal due diligence.
A review of technical data, procedures, parameters and results structured to establish in detail the level of quality of technical work and to identify, review, quantify and, provide detailed recommendations associated with project risks of a technical nature.
The Due Diligence report should provide a high level of comfort & assurance to the client that the technical basis for the project is of sound quality and that the results of the various technical studies may be relied upon with confidence. Or where such comfort and assurance cannot be given, provide recommendations as to what needs to be addressed to generate the required levels of technical confidence.
Stage 3 – Due Diligence Extension Report
A report providing an independent re-working of certain project elements from base data, where those elements were investigated and found to be lacking. The report includes a review of the financial models to provide an independent opinion on possible financial outcomes, using relevant parameters including product pricing assumptions and other forward-looking estimates provided by the client.
Technical Jargon aside – What does this mean if you are looking to buy a mine site?
In general terms a brown fields mine site typically comprises (but is not limited to) the following –
- Pits or Underground workings
- Waste Rock Dumps
- Tailings Dams
- Plant – depending on the mineral will include assets such as tanks, mill, crusher, power station
- Camp and associated utilities (water, power, sewage)
- The mill, crusher and power station will require a due diligence with regards to electrical, mechanical and civil structure.
- Road networks, landfills pipelines
Due Diligence from an Engineering and Safety Point of View
- Does it still work?
- Is it safe?
- Is it compliant?
How much will it cost to make run, be safe and be compliant?
And that’s just the plant. Has the pit or underground flooded and does it need dewatering? Are environmental licences and approvals in place for dewatering?
Due Diligence from an Environmental Point of View
Is there enough recoverable ore there to justify the cost of pulling it out of the ground, process it, transport it, whilst progressively rehabilitating and then closing the site?
Environmental liability on a project is often brushed over by junior miners because it isn’t their focus and it doesn’t help with the spin put out to raise money. In Western Australia if you have a waste rock dump or tailings dam on your tenement and there hasn’t been a break in tenure if you buy the tenement – you buy the closure liability. These are costs that proponents must feed into their feasibilities; otherwise that project may not be particularly feasible at all.
Environmental liabilities on brownfield sites that can cost a lot of money to rehabilitate and close include – waste rock dumps – the DMP specifies that they need to be safe, stable and sustainable. This is very difficult to achieve if the project is marginal and there are few sites in Western Australia that have achieved sign off.
Then there are the tailings dams and heap leach – many legacy structures may never prove safe, stable and sustainable without enormous spend. Costs you want to identify early on!
As a result when you do your site due diligence – don’t just look at the reliability and safety of the physical assets and the amount of ore present – the environmental aspects (historical, operational and closure) must be taken into account. The price of operational environmental management and closure must be given a true dollar value. Simple concept but often forgotten or brushed over in the rush to own a project and pull some ore out.
Multidisciplinary teams covering Commercial, Legal, Mechanical, Civil Structural, Electrical and Environmental are essential to show the full picture of what you are buying: the good, the bad and the ugly. Unless you don’t want to know…
Rapallo can help
Rapallo has both local and international technical due diligence experience with Australian, African, European, Scandinavian and Asian-Pacific project business cases.
Click here for Rapallo’s Engineering and Project Capabilities
Click here for Rapallo’s Environmental Capabilities
Click here for Rapallo’s Asset Management Capabilities
If you are needing help with due diligence on a project, give Rapallo a call on (08) 6279 0900.
Alternatively, request a quote or a call back.