Considering M&A? Here’s what to ask

A large copper miner in Chile only found it had been overpaying a royalty by a significant amount after three ownership deals and 20 years of operation, lawyer Greg McNab told a mining conference in New York.

“They took it in under the umbrella of an M&A exercise and they just assumed that ‘we’ll just keep doing it the way the company had been operating,’” the partner at Dentons in Toronto said. “So, you actually should just read that stuff.”

It was just one of the due diligence tips to emerge from a panel at the event run by the Society for Mining, Metallurgy & Exploration. Others were about partnerships, price and closure costs. The May 21 discussion also mentioned mine plans, management and the environment. Three experts from SRK Consulting, which has 45 offices globally and has operated in more than 150 countries, filled out the panel.

It’s important talk early and often to partners such as companies, communities, Indigenous groups or governments and research them on social media, Jeff Parshley, an SRK consultant on the environment, mine closure and reclamation, told the panel. It can improve insight about them when time is short in a potential deal’s data room, he said.

“That can give you some idea of whether you have supportive partners or not,” Parshley said. “And what the current buzz is on the project.”

Partnerships

Joint ventures, streaming and royalty agreements can harm projects if companies aren’t aligned in experience and expectations, said Matthew Sullivan, principal mineral economist at SRK.

“It can get very, very complicated very quickly and the project essentially stalls out,” he said. “Depending on where that streamer or royalty sits in the security structure, they may not care but it may make the project undevelopable.”

Streaming or royalties that are too high may restrict enough free cash flow to pay for debt or to satisfy an equity investor, Sullivan said. More potential difficulties arise in joint ventures with minority holders competing for a slice when they hold rights of first refusal, he said.

Determining a suitable price for a project depends on its development stage, the value of the commodity, and the company’s expertise, Sullivan said. Have they seen this before? he asked. Do they know what this price environment is capable of?

“Explorers really don’t know how to build a mine; mine builders really don’t know how to operate a mine and operators definitely don’t know how to explore for new mines,” he said. “So, it’s really critical to understand what your management team actually is and how appropriate the stage in the project is for them.”

Discipline

Potential buyers should evaluate operators for discipline in a high-priced metal market, he said. They shouldn’t cut corners to deplete a mine’s best ore to maximize profit, leaving the buyer to contend with higher access costs later in a low-price market.

“The cash flow model is almost always wrong,” Sullivan said. “If there’s a bunch of errors in it, hopefully they aren’t too impactful, but they are there.”

The ease of a mine’s scalability should also be considered, Sullivan said. Is it a complex underground mine with expensive infrastructure, or an open-pit operation with a low stripping ratio that can be expanded easily? Can the property make money in a low-price metal market? Even if it’s not expandable, a mid-tier cash cost operation could be successful, he said.

“You have something that you can kind of bounce along the bottom and keep it running, keep everything in shape and people employed,” he said. “When the price spikes, you can actually take advantage of that price change.”

Battery metals

The industry’s new emphasis on battery metals brings new legal concerns over the different levels of funding and pledges, sometimes from other countries like the United States supporting projects in Canada, McNab said.

“It can get quite complicated about where the money to fund the project is actually going to come from,” he said. “You have to spend a lot of time looking for things such as actual definitive commitments because they’re sometimes buried in kind of flowery commitments that can change when governments do.”

Offtake deals are becoming more common as automakers and original equipment manufacturers (OEMs) secure battery materials. But they carry risks.

“If something happens and that OEM doesn’t want the material that comes out of that operation, the operation fails,” he said. “Their major off-taker is gone.”

Nearly all mine closure cost estimates in data rooms are too low because they’re based on government requirements, but not how a miner would actually rehabilitate a site, Parshley said. They may even turn a mine’s net present value negative. Plus, industry guidelines for seismic and storm stability are getting stricter.

Potential buyers also should beware of some jurisdictions that don’t require assessments of long-term post-closure costs, and those could need perpetual water management.

“You’re now signing up for the long term,” he said. “We’re talking millions of dollars a year.”

ESG

SRK usually applies international standards for environmental, social and governance (ESG) issues because many methods, such as the Equator Principles, are vague, Parshley said. The firm must educate clients a fair bit, he said.

Often, ESG is considered a last-minute check-list to avoid “landmines,” McNab said. Companies should instead integrate the target company’s ESG process with their own.

“The only way you can do that is to find out exactly what they’ve been doing,” he said. “That is such a broad bucket that people don’t normally want to break it down.”

Companies should trust but verify when assessing a deal, said Parshley, citing a Russian proverb that Ronald Reagan applied to Cold War arms talks. The consultant recounted one company’s pledge that it had Indigenous OK for a tailings site when investigation found only 10% was approved. That meant delaying the project for about a year.

The panelists said more funding deals and ESG requirements make a data room’s organization important. Recalling a small heap leach miner in the Sierra Madre mountains, Parshley said some clues are in how tidy a company is.

“You could have eaten off the floor. I had never seen anything quite like it and when we started digging in, we found out that these guys ran a very, very tight operation,” he said. “You look in the corner and there’s a mess, that usually sends up a bit of a red flag.”