CHAPTER 10 MANAGING RISK IN MINING ACQUISITIONS
| Jurisdiction | United States |
(May 2008)
MANAGING RISK IN MINING ACQUISITIONS
Phoenix, Arizona
Sarah H. Strunk
Fennemore Craig, P.C.
Phoenix, Arizona
Dan P. Kravets
Freeport-McMoRan Copper & Gold, Inc.
Phoenix, Arizona
I. Introduction.
II. Management Approach.
A. Understanding the board of director, senior management and shareholders' threshold for risk.
B. Understanding of the dynamics of the company's existing resources (size, price sensitivity, upside for additional mineralization in existing resources).
C. Understanding the capacity of the company to acquire new resources:
1. Limitations in existing agreements, support for the company and growth in the equity and financial markets;
2. Limitations on where you can grow (country, cultural, regulatory);
3. Competitive landscape - dominant players globally in the commodities of interest and in the markets of interest;
4. Test assumptions for growth;
5. Commodity supply and factors impacting volatility of supply;
6. Commodity demand -- global and regional;
7. Test validity of a sale versus an acquisition; and
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8. Identification of a multidisciplinary team to support the evaluation and acquisition of potential targets, consisting of technical, legal and financial subject matter experts.
III. Risk Areas.
A. See, Thomas G. Bateman, Jr., Checklist for Resource Asset and Stock Acquisitions: Domestic and (Certain) Foreign Issues, Chapter 7, Rocky Mountain Law Foundation Mineral Law Institute (2001).
B. Environmental.
1. See, Boyd A. Bryan, Environmental Due Diligence in Mineral Property Transactions: Emerging Risks, Requirements, and Strategies, Chapter 24, Rocky Mountain Law Foundation Mineral Law Institute (2005).
2. Materiality threshold.
3. Legacy issues and historic ownership issues: are you expanding liability because of prior partnerships, joint ventures?
4. Permit issues: status of applications, compliance with and transferability.
C. Royalties (private and governmentally imposed).
1. Stability issues, such as tax stability agreements in the international context and potential changes in laws.
2. Informal royalty arrangements, such as voluntary contributions to the local communities.
D. Title.
1. History of honoring title, licenses or concessions to mining property.
2. Transfer risks for title to exploration, extraction and mining permits in countries where the target operates.
E. Contracts.
1. Materiality threshold.
2. Change in Control Assignment Risks.
3. Assessment of third-party partners (vendors, sales, etc.)
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F. Reserves/Resources.
1. Strength of calculations and analysis.
2. Review any prior audits or analysis of target.
3. Review underlying assumptions.
4. Audit previous reserve estimates: geological and mineable.
5. Obtain drill logs (computerized if available) and review.
6. Plot maps: topography, cross sections.
7. Run statistics for the deposit(s).
8. Review grade cutting limits.
9. Evaluate deposit model.
10. Audit operating costs used in mine design.
11. Outside reserve audit.
12. Compare reserve estimates.
G. Labor/Employment.
1. History of labor unrest or union involvement, directly or indirectly impacting target.
2. Source of qualified production and management employees.
H. Derivatives/Hedges.
1. Credit Event upon Merger Termination Events (ISDA®).
2. Margin requirements.
3. Potential losses, commodity price risks.
I. Operations (see below).
J. Foreign Corrupt Practices Act/Anti-corruption controls.
K. Abandonment Liabilities.
1. Reclamation liabilities and analysis.
2. Sufficiency of reserves and bonds.
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IV. Initial Project Assessment: Due Diligence.
A. Structural Issues.
1. Is the target for sale?
2. If it is not for sale, what would it take to put it into a position to sale? Is there a possibility of a friendly or hostile acquisition?
3. How long will it take to be in a position to acquire the target?
4. Develop relationships with owners and shareholders.
B...
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