TECHNICAL DUE DILIGENCE FOR THE MINING INDUSTRY

The energy transition is a boon for the mining industry. Huge volumes of metals is needed to build the clean energy infrastructure required to decarbonize the global economy. But current plans for new supply fall far short of anticipated demand. Governments have developed critical minerals strategies. 

Mining companies see a growing market for many metals but too few are building new mines. Investors want exposure to the energy transition and yet the mining sector is struggling to attract capital.

There is a huge opportunity for the mining industry to supply the energy transition but unless companies, governments and investors pull in the same direction, new mines will not be built, production will not increase and the transition will stall. 

The opportunity to invest in mining projects is exciting and lucrative where one invests in the right project. However, there are many issues that one needs to consider before diving into a mining investment. This brief shall explore some of the critical issues that need to be assessed by a prospective investor, be it a small or large-scale project.

APKA follows a structured process of assessing a prospective opportunity based on Global Best Practice Standards while conducting the due diligence exercise. To acquire all the information referred to in this Brief, the Parties need to sign a non-disclosure and non-circumvention agreement to ensure that safeguards are in place to avoid the misuse or negligent handling of information divulged between the Parties during this process.

APKA conducts the exercise from the perspective of the investing party, that is, the person/s and/or institution/s who has been invited and/or the person/s and/or institution/s considering investing in a mining project.

APKA deep dive seeks extensive knowledge of the potential partner, the state of progress on the project, an on-site inspection to verify what has been physically established, and analysis of all documentation available regarding the proposed project scope and terms. The due diligence consideration for established mining companies differs from the issues one would look at with green filed projects. 

The potential promoter's appropriate professional legal, geology, and financial expertise is essential when undertaking a due diligence exercise to receive the requisite advice on key considerations. Notwithstanding, some key and common key areas of due diligence include the adjacent technical framework.

The process for ore reserve estimation as summarized by Appleyard et al, 2001, defines the context for the key questions within the technical due diligence process. These are questions that pertain to the inputs and the activities in deriving the resource and reserves on which an assets value is determined.

Based on Rosenbloom’s (2002) generic framework for operational due diligence, APKA technical due diligence team when reviewing the inputs and activities of the ore reserve estimation process considers the following evaluation metrices:

1. SWOT based deal rationale
2. Benchmarked and Milestone based Roadmap
3. Burn Chart with Gantt and PERT parameters
4. The drivers of value creation and any significant hurdles
5. The critical aspects and fatal flaws
6. Post-deal integration requirements
7. The negotiation and pricing strategy
8. The macro framework, e.g. trade growth
9. The economic factors e.g. foreign exchange rate
10. Political factors including social obligations

1. Adequacy of Mining Rights & Titles
2. Sufficiency of Surface Rights
3. Royalties, Agreements, & Encumbrances
4. Other Significant Factors & Risks
5. All company Constitutional Documents – Certificates and documents of incorporation, Memorandum and Articles of Association, Share Holders Agreements
6. Company Audited Financial Statements
7. Declaration of legacy debts or obligations
8. Valid tax clearance must be provided to verify the tax standing of the entity
9. Verification of standing of statutory key fees and levies
10. Full disclosure of all and any material adverse information

1. Water Access, Quality, Reliability
2. Power Access, Quality, Reliability
3. Roads/Physical Access
4. Communications
5. Labor Availability & Skills
6. Material Shipping/Transport Logistics
7. Local Health, Safety, & Security
8. Buildings & Structures
9. Potential Tailings, Waste, & Leach Pads Areas
10. Other Infrastructure
11. Offsite Support

1. Recovery Estimate Assumptions
2. ample Representativeness
3. Contaminates & Ore Variability
4. Metal Balance
5. Test/Operational Results
6. Crushing, Grinding, Process Flow
7. Plant Design & Equipment Sizing
8. Consumables
9. Stockpiles, Tailings, & Waste

1. Mining Methods
2. Mining Fleet Requirements
3. Production, Scheduling & Mine Life
4. Dilution & Cutoff Grade
5. Mineral Reserves

1. Capital Cost Estimates
2. Basis for Capital Cost Estimates
3. Operating Cost Estimates
4. Basis for Operating Cost Estimates.

1. Environmental Studies
2. Environmental Issues
3. Required Permits & Status
4. Operating Requirements & Plans
5. Reclamations & Other Bonds
6. Ponds, Tailings, & Dams
7. Emissions, Dust, & Noise
8. Waste Rock Runoff
9. Mine Closure
10. Social & Community

1. Project Management
2. Engineering
3. Cost Control
4. Procurement
5. Construction
6. Commissioning

1. Management & Supervision
2. Labor/Skills
3. Health, Safety, Security
4. Personnel Scheduling & Logistics
5. Geology, Mine Planning, Ore Control
6. Production Targets
7. Cost Control
8. Maintenance Critical Spares & Skills
9. Mechanical Availability
10. Weather/Climate/Altitude
11. Annual Mine Inspection Receipts
12. Mine Managers Certifications
13. Water permit (Water extraction licenses), water disposal license
14. Effluent discharge license
15. Emission License
16. Radiation Licenses
17. Blasting licenses
18. Mine Magazine Certification
19. Export licenses
20. Exchange control regulations

1. Market Studies & Contracts
2. Long Term Labor Costs
3. Long Term Power/Fuel Costs
4. Forward Cover
5. Available Indemnities
6. Lateral Support
7. Principal Economic Assumptions
8. Cash Flow and Annual Production recasts/Actual
9. Taxes, Royalties and Other Interests
10. Sensitivity Analysis
11. Value at Risk
12. Cash at Risk
13. Comparable Companies Multiple Method
14. Comparable Transaction Multiple Method
15. Porter's Five Forces Analytics

1. Political, Social, Economic Stability
2. Supply Chain
3. Industrial Relations
4. Insurance
5. Regulations/Legal
6. NGOs / Social License