JurisdictionUnited States
Due Diligence in Oil & Gas and Mining Transactions
(Sept 2018)


Wayne M. Chancellor
AngloGold Ashanti Americas, Inc.
Denver, CO
Dana Svendsen
Sherman & Howard
Denver, CO

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WAYNE M. CHANCELLOR is the VP & General Counsel for AngloGold Ashanti Americas, Inc., a division of AngloGold Ashanti Ltd. As General Counsel, Mr. Chancellor is responsible for legal matters relating to all gold mining operations and projects in North and South America (Argentina, Brazil, Colombia, and the U.S.) for AngloGold Ashanti, to include the buying and selling of mining assets on both continents. He also serves as the regional Compliance Officer, overseeing the development and implementation of compliance programs across the region. Mr. Chancellor has experience in private practice as a patent attorney, and as a partner with Holland & Knight LLP. Prior to the practice of law, Mr. Chancellor served in the armed forces (U.S. Army) and as an engineer for several defense contractors. He is the author of "Building an Effective Ethics & Compliance Training Program for a Diverse Multi-National Workforce", 2014 Compliance & Ethics Institute, Society of Corporate Compliance and Ethics, September 2014; and co-author with Janet Savage of "Personnel Risk Management", Special Institute on Strategic Risk Management for Natural Resource Companies and Their Advisors, Rocky Mountain Mineral Law Foundation, May 2008.

DANA M. SVENDSEN is workplace safety and employment attorney. She is a Counsel Member in Sherman & Howard's Denver office where she practices in the Safety and Health OSHA/MSHA and Labor and Employment Practice Groups. Ms. Svendsen represents industry in matters relating to the Mine Safety and Health Act, the Occupational Safety and Health Act, and other state and federal health statutes in the areas of compliance, policy, legislative and regulatory matters, civil and criminal enforcement issues, accident investigations and special investigations on both state and federal levels. She regularly appears before the Administrative Law Judges in MSHA and OSHA matters, and handles litigation from pretrial discovery to post trial appeals. Ms. Svendsen has participated in numerous serious and fatal accident investigations through conclusion of the investigation and subsequent litigation. Ms. Svendsen received her Juris Doctor from the University of Denver Sturm College of Law and a Bachelor of Science degree in Civil Engineering from the University of Nebraska.

I. Introduction

The technical aspects of mining operations, as opposed to functions such as HR and Legal, are what typically drive the risk profile and value assessment for a Buyer in a transaction for the sale and purchase of a mining asset. The question becomes - how well are the technical concerns of the due diligence team reflected in the language of the sale and purchase agreement (the "Agreement") and the corresponding negotiations, and what aspects of the operation are most critical, from a value assessment perspective?

Too often the purchase of a mining asset is a bifurcated process whereby the drafting and negotiation of the Agreement, and decisions regarding the underlying terms and conditions (to include price), are divorced from the details of the due diligence process. This can be especially problematic when considering technical due diligence, where the technical details of an asset's operation can significantly impact both the risk tolerance of the Buyer and a subsequent offer to purchase. These two critical elements of the acquisition process (the preparation/negotiation of the Agreement and due diligence) often progress in a virtual vacuum relative to each other, limiting or preventing an exchange of information and ideas which could help the Buyer assess relevant risk elements, quantify and qualify the magnitude and nature of the risks, and use the legal tools at its disposal to manage and mitigate risk.

A disjointed sales and acquisition process can be fatal to the business success of the Buyer, to the extent that success is tied in any material way to the acquisition of the mining asset. Given the volatile and cyclic nature of mining in general, and the limitations many companies have when it comes to financing a transaction (limited cash, undervalued stock, expensive financing options, credit problems, etc.), companies cannot afford to misjudge the value of an asset. Due diligence is a means, and perhaps the primary means, by which the Buyer attempts to ensure success and limit risk. As such, a robust technical due diligence process, designed to inform the drafting of the Agreement, is a business necessity. Stated differently, "[r]epresentations and warranties [in a sale and purchase agreement] ought to be

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deliberately and thoughtfully crafted and wrought from the issues identified in the due diligence stage; the specific risks that the purchaser is concerned about based on the industry . . . and appropriate and fair negotiation"1

This paper will examine and discuss an integrated sale and acquisition process, primarily from the Buyer's perspective, whereby the preparation and negotiation of the Agreement, and decisions regarding the final terms and conditions, are aligned with the actions and outcomes of the technical due diligence. We will first examine briefly the relationship between technical due diligence and the business side of a M&A activity (e.g. drafting and negotiating the Agreement, defining the purchase price, etc.), in the context of purchasing a mining asset. We will present various methods and tools for ensuring process integration. The goal will be to demonstrate how a robust and thorough due diligence can lead to a robust and workable Agreement acceptable to the Buyer and representative of the Buyer's risk threshold. We will then look at a sampling of technical disciplines associated with mineral mining, some of which often may be minimized during due diligence in favor of the "big three" i.e. resources & reserves, mining & processing, and environmental. As part of this analysis, we will look at certain specific due diligence tasks that one might find as part of a well-drafted due diligence checklist, and discuss issues that are typically highlighted during due diligence. The technical areas to be discussed include: Mine Safety and Health ("MSHA") regulatory compliance; infrastructure, facilities, and equipment; and supply chain management. To be clear, the intent is not to cover the gambit of technical disciplines found on a mine site, or to make technical experts of the readers (we will leave the true technical expertise to the true technical experts). Our goal instead is to provide attorneys and others associated with the "business" side of a mining acquisition (the "business team") a view on how to improve the due diligence process and better integrate it into the overall transaction. To accomplish this goal, we use three technical disciplines to highlight the level of detail that should be expected in due diligence, choosing one area related to regulatory control, one are related to mining itself, and one area related to mining support.

Throughout this paper we will use several terms to facilitate the discussion. For the sake of clarity, we will define the terms in advance. These terms include:

"Asset or Mining Asset" - a single mining operation or a mining company composed of one or more mining operations;

"Due Diligence" - research and analysis of an asset, company or organization done in anticipation of a business transaction. Generally speaking, due diligence can be either "targeted", which is to say focused on the risks and issues associated with the asset to be acquired, or it can be "transactional", i.e. focused on the risks associated with completing the transaction (e.g. financing, third party approvals).2 For the purposes of this paper, the focus will be on targeted due diligence of various technical disciplines.

"Business Team" - the Buyer's team of individuals chartered to draft, negotiate, and finalize the sale and purchase Agreement. This team typically consists of senior M&A personnel, various senior technical leads, and the lawyers responsible for drafting and supporting the negotiation of the Agreement.

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"Technical Discipline(s)" - disciplines associated with mining operations, and operational support, rather than those that are typically classified as administrative. This may include a broad grouping of disciplines from mine planning to purchasing to processing to health and safety, for example.

II. The Relationship Between Technical Due Diligence and the Work of the Business Team

A. Understanding the Buyer's Objectives and Approach

Before there can be an effective, integrated due diligence process, and before that process can appropriately inform the preparation and negotiation of the Agreement, members of both the Buyer's technical and business teams must understand the objectives of the due diligence process, the approach to be taken with due diligence (e.g. "fast and furious" or "slow and detailed"), and the aim of the Buyer in drafting and negotiating the Agreement. It is also important, at some level, to consider the likely objectives of the Seller. For example, the Buyer may be focusing on: (1) defining a fair value for the asset while minimizing cost; (2)...

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