Technical Due Diligence what do we look out for?

Transcription

1 Technical Due Diligence what do we look out for? AusIMM M&A Masterclass May 2014 Mark Noppe General Manager and Principal Consultant XstractGroup.com Xstract - Excellence from the Outset GEOLOGY ENVIRONMENT GEOTECH GEOLOGY MINING MINING PROCESSING PROCESSING VALUATION/RISK VALUATION TECHNOLOGIES RISK ENVIRONMENT TECHNOLOGIES TRAINING

2 Disclaimer This presentation is a summary of a full presentation delivered to the South Queensland Branch of the AusIMM on Tuesday 20 May 2014 by Mark Noppe of Xstract Mining Consultants. This presentation may contain some market information which has been calculated for the purposes of this presentation, and not for any valuation exercise. Any results shown in this presentation are purely for illustrative purposes only. The due diligence investigation of mineral assets and companies typically requires specialist sector knowledge. This presentation deliberately simplifies key concepts for the purposes of explaining in a simplistic manner. Users of this presentation should not rely on this presentation for accuracy in undertaking a due diligence of a minerals asset or a mining industry related company. For further information regarding this presentation, please contact Xstract Mining Consultants. 2

3 TALK CONTENT 3

4 Content: Resource project reality check Background What can go wrong? Reporting context Exploration Results and Exploration Targets Mineral Resources and Ore Reserves Mining value chain Technical-economic studies What does the term feasibility study mean? Confidence (accuracy and risk) in study types Real world example Due diligence Mining context Study types and levels of detail Mineral asset valuation 4

5 WHAT CAN GO WRONG 5

6 Background: What can go wrong Historical reasons of why resource projects fail 6

7 Background: Risks in resource projects Mining Equipment Skills & Labour Availability Mining Method Financing Insurance Infrastructure Corruption Weather Impact Expropriation Foreign Exchange Climate Technological Joint Venture Interest Rate Commodity Price Management Processing Recoveries Ownership Tenure Environmental Accounting Rules Debt Gearing Fiscal/Dividend Policy Documentation Mineral Deposit (Tonnes/Grade) Opex/Capex Foreign Exchange Group Structure Reporting Sovereign Debt Reputational Commodity Substitution Geotechnical Cultural Dilution Labour Unrest Marketing Technical Financial Legal Jurisdiction Strategic 7

8 LETS GET THE CONTEXT RIGHT 8

9 Context: Importance of Resources/Reserves NPV Discount rate Capital / Operating Costs Revenue, recovery & pricing Resource / Reserve estimates Ore definition Geological interpretation Resource estimate Reserve estimate Mine planning 9

10 Context: Mineral asset development stages (VALMIN, 2005) Project development stage Criterion Exploration areas Advanced exploration areas Pre-development / resource Development Operating Mineralisation may or may not be defined, but where a Mineral Resource has not been identified. Considerable exploration has been undertaken and specific targets identified. Sufficient work has been completed on at least one prospect to provide a good geological understanding and encouragement that further work is likely to result in the determination of a Mineral Resource. Mineral Resources and/or Ore Reserves were identified and estimated. A positive development decision has not been made. This includes properties where a development decision has been negative and properties are either on care and maintenance or held on retention titles. Committed to production but not yet commissioned or not initially operating at design levels. Mineral properties, in particular mines and processing plants, which were fully commissioned and are in production. 10

11 Terminology in context (JORC Code, 2012) 11

12 Mining value chain in context example 12

13 Mining value chain in context - example 13

14 TECHNICAL-ECONOMIC STUDIES AND ASSURANCE/CONFIDENCE 14

15 Types of study Scoping Study or Preliminary Assessment Broad brush, back of the envelope Do not use term Feasibility, generally no Reserve Pre-feasibility Study Firming up on the numbers, evaluating options, identify preferred option Feasibility Study Decision to develop and/or fund Do not use term bankable assumes the study will be automatically accepted (the bank will decide!) 15

16 Types of study After Hatch 16

17 Technical-economic studies in context (what industry generally accepts, but the Codes don t say) Measure / Item Scoping Study Pre-feasibility Final Feasibility Study Study Cost accuracy ±25%-50% ±15-25% ±10-15% Cost contingency 30-50% 15-30% <15% Proportion of <5% <20% <50% Engineering complete Resource categories Mostly Inferred Mostly Indicated Measured and Indicated Reserve categories None Mostly Probable Proved and Probable Mining method Assumed General Optimised Mine design None or high-level conceptual Preliminary mine plan and schedule Detailed mine plan and schedule Scheduling Annual approximation 3-monthly to annual Monthly for much of payback period Risk tolerance High Medium Low 19

18 A REAL LIFE REPORTING EXAMPLE 20

19 Example statement (5 July) 21

20 Example retraction and clarification (28 July) 22

21 Mining value chain in context this example 23

22 TECHNICAL DUE DILIGENCE 24

23 Due diligence studies caveat emptor Let the buyer beware Source: < 25

24 What, Who, When, Where, How? An investigation in the material facts of a proposed transaction which may lead to an investment Undertaken by the investing transaction counterparty Often involves advisors and consultants Usually prior to the investment transaction occurring In the offices and the site of the recipient counterparty Typically involves the checking of legal, commercial and technical data 27

25 Due diligence success Legal (Lawyers) Commercial (Accountants with technical experts) Technical (Geologists and Engineers) The correct decision! (invest or not) 28

26 Legal Does the tenement exist? Does the owner have rights to it? Are these assignable (i.e. in the proposed transaction)? Encumbrances? Future permits? Social license to operate (including local people)? Any government issues? 29

27 Commercial Can the development of the tenement possibly make money? (if, then) Taxes, rents, rates, royalties, minimum expenditure, validity dates? Expected outcome and potential future NPV? Any financial encumbrances of the company/tenement owner? Do any committed contracts, formal and informal, exist? 30

28 Technical What are the Resources and Reserves (if any)? If not, what do you hope or expect to eventually be present at this project? What the processes (mining, extraction) to get the concentrates to a saleable form? Infrastructure, current and required? Are the physical characteristics modelled correctly in any potential economic evaluation? 31

29 Examples of M&A due diligence Exploration project Single discipline review (geological team) generally Short time frame with positive and negative aspects to be identified Producing property Large and multidisciplinary team Geology, mining, geotechnical, metallurgical and environmental Requires significant input from legal team Time frame will be dependant on level of detail Public company Significant input from legal and accounting teams Large and multidisciplinary team Can have a significant time-frame Source: < 32

30 Full due diligence Country risk Political risk Security of tenure Approval process Land compensation claims Nature of deposit Basis of resource estimate Mining scenario Geotechnical model Metallurgy and processing Due Diligence Business model Tax regime Social aspects Health and safety Human resources Reputation Corporate governance Equator Principles Compliance with legislation Heritage, fauna and flora areas Closure provisions Hydrology 33

31 Types and level of due diligence Data Full due diligence (detailed technical audit) Process review Process Time (cost) 34

32 Insights Due diligence is an important multi disciplinary activity which takes place prior to any investment It varies depending on the scope and scale of the proposed transaction; it can take weeks and thousands, or months and millions Important to advance various aspects of due diligence in harmony to optimise timing The due diligence exercise should provide the investing company an appreciation of the risks and issues with the proposed transaction All jurisdictions, commodities, project types have risks Purpose of due diligence remains to make the right decision given the events and timing 35

33 AND THEN THERE IS THE MINERAL ASSET VALUATION 36

34 Valuation approaches Approach Appropriate Method Exploration Development Production Dormant Defunct Income Not generally used Widely used Widely used Used Not generally used Market Widely used Less widely used Widely used Widely used Widely used Cost Used Not generally used Not generally used Less widely used Used Industry practice Use at least two different approaches Justification of primary and secondary valuation methods While DCF remains the most widely accepted approach, sector specific methods are also appropriate, especially for predevelopment assets Mineral asset valuation is underpinned by the mineral deposit (Resources/Reserves) 37

35 Conclusion Even small errors (10%) can make a big impact on profits, nearly everything is potentially material. Assume nothing, check everything, trust no one! ~Harry Parker, 2004 P.S. Don t forget to assess the UPSIDE! Source: < < /2006> 38