MINISTRY OF NATURAL ENVIRONMENT PROTECTION OF UKRAINE
London Metal Exchange LME
LME quotations (INFOGEO.RU)
Due diligence
What is the difference between acquisition of a mining business and any commodity? Buyer of the latter is protected form risk of purchasing defective goods by the producer’s and seller’s quality control departments, Law «On protection of Consumers», possibility to choose, available information on goods, etc. Purchaser of a mining business is in the exactly converse situation and often relies on (or has to rely on) deposit data received from a seller. That is why he should not only observe rules of M & A agreement conclusion, but take into consideration real situation in the country and be well-informed in geology and mining at every stage of the acquisition process. Otherwise, a buyer runs risks to lose money spent for the deposit acquisition.
It should be taken into account, that non-confidence between contracting parties is one of the business features and sellers do not like to disclose complete information, but prefer to present a mining project from the most attractive sides. Experience shows, that utmost 20% of companies are ready to disclose trustworthy data on deposits and mining projects, and, even if this occurs, not factual indices are meant, but only a formal list of necessary information.
If you plan to purchase a mining business, as well as to materialize merger (takeover) agreements, you need Due Diligence (DD) of an investment object. In the western market, none of such agreements can be concluded without such auditing. DD helps to obtain true and fair view of a deposit, area of subsurface resources or mining project, as well as contents of a license agreement and includes risk assessment and independent evaluation of an investment object and many other factors.
Primarily, DD of a mining business is intended for:
comprehensive checking of legality and commercial attractiveness of intended agreement on acquisition of rights for a deposit or area of subsurface resources and investment mining project;
quality and completeness of information on a deposit or area of subsurface resources, characterization of competitiveness of mineral raw materials exactly from that deposit.
As the experience shows, lack of proper auditing may result in incorrect decision, project “freezing” or losses during its implementation after change of ownership, as well as many other negative consequences. It is also known, that unsuccessful conducting of business by companies which acquired mining operations is often caused by unsatisfactory auditing procedure or unprofessional consultants.
DD procedure starts from the moment, when a buyer only begins planning of possible acquisition (takeover) of a company, which owns rights to an area of mineral resources (deposit). Searching, monitoring and analyzing of information are done for determination of the company/deposit cost and interest in its acquisition.
In this way, aim of the DD procedure is avoidance or minimization of existing business risks (economic, legal, tax, political, marketing), in particular:
risk of buying an overpriced company (parcel of shares), which is an owner of a special permit for mineral resources area;
risk of property and money losses;
risk of causing damage (losses) to assets, including intangible ones (e.g. business reputation);
risk of losing a special permit for an area of mineral resources, legal proceedings in this connection and their adverse consequences;
risk of invalidation of a sale and purchase agreement;
risk of tax, administrative and criminal prosecution in connection with non-fulfillment of a license agreement and/or violation of mineral resources legislation;
risk of losing intellectual property;
political risks and risk of losing administrative resources (changes in legislation and/or replacement of an official, from whom success or stability of a mining project depends);
risk of unfair acts of competitors (collusions in land relations, etc.);
risk of non-receipt or losing of appropriate permits, approvals, etc. from which a project depends.
Both an investor (buyer) and party attracting investments (seller) are interested in unbiased and competent fulfillment of DD procedures, in which course a Customer may choose either audit consisting of three interconnected stages or one of them, including as follows:
evaluation of an investment object, reliability and required completeness of information on an area of mineral resources and status of license agreement implementation;
appraisal of bookkeeping and reliability of reporting, as well as financial analysis and assessment of tax risks;
legal assessment of risks connected with rights in an area of mineral resources, review of foundation documents.
Stage 1. Investment object evaluation. Objective of this stage is to show real cost of rights in an area of mineral resources/deposit depending on options of its future utilization. Results of those works are summarized in a Report on Business Valuation.
Stage 2. Audit of bookkeeping and tax accounting system, which aim consists in financial analysis, expert examination of a company’s activity and determination of tax privileges and risks.
Stage 3. Legal analysis. Task of this stage is legal assessment of a company’s foundation documents, investigation into legitimacy of its activity, existence and execution of required license agreements, special permits and approvals with the aim of revealing as many legal risks as possible.
As a rule, all stages of DD are fulfilled simultaneously to optimize the entire procedure and its timeline. You can limit yourself to one or another stage, as well as to choose those procedures, which, in your opinion, are of importance for taking the right decision.
During carrying out of comprehensive evaluation of a project, personnel of Ukrgeoproject MC use methods, which allow to check viability of the entire project, from review of quality and completeness of geological exploration, grade and tonnage of mineral reserves in a specific deposit, their future mining and mineral commodities utilization to comprehensive examination of financial and legal documents. Most often, independent examination of a mining business matter and rights to conduct it is performed, because that data secure taking of right decisions based on independence and quality of evaluation. At the same time, it is better to engage consultants at the earliest stage of agreement planning to avoid mistakes, for correction of which unbudgeted and usually large sums will be spent.
We can fulfill the following independent examination:
the entire DD procedure or any stage of works separately,
on the part of a business buyer or its seller.
As a result of our services, a Customer and investor will have sufficient and independent information for making proper decision: data on real price of a deposit (mining project) to be purchased, as well as of a company-owner and characterization of possible risks.
Reports drawn up based on results of the fulfilled works are executed in the Ukrainian (Russian) and (or) English languages depending on Customer’s wishes and are passed to him, becoming his property with the appropriate obligations as to information confidentiality.
As our practice shows, in most cases audit results provide our clients with arguments with the help of which a starting price of a business can be substantially reduced. Rather often, decisions regarding refusal from acquisition of one or another deposit or mining business are taken.
