As the increasing demand for quality mining projects and products in recent decades, many Chinese mining companies are finding and exploring overseas mining resource, getting involved in the activities of overseas mineral resource development in the way of exploration, merger and acquisition, production contracting and etc. Especially after 2008, the investment pace has been speeding up, with the annual growth of 30%, and takes up 40% in total overseas investment. However, many enterprises didn’t get the crucial skill of risk control in overseas mining investment project, and resulted in many failure cases, that’s why the importance of due diligence in overseas mining investment risk control has been recognized widely.
Case Study
1. The Exploration Right Project of A Coal Mine in Middle Australia
To search for enterprise transformation and take effective utilization of accumulated funds, one Chinese high-tech enterprise set up a mining company specially and got in touch with one exploration right in Middle Australia at the end of Year 2010, planed to carry out further exploration and project development.
According to geological documents, the ascertained coal seam burial depth of this exploration right is 90-130m, coal dip angle 5°, coal seam thickness 4.5m, coal type is coking coal, resource is about 60Mt.
This mining company formed due diligence team with the leadership of Chairman, hired an Australian Chinese professor as liaison,who has Chinese liberal major background, and the other team members were from geology profession in the beginning stage.
In the first half year of 2011, Chinese domestic team(mainly geologists) contacted many times with the external liaison and made the judgement that the geological documents are reliable and the project is executable.
In the second half of 2011, the mining company sent out six people with the profession background of geology, coal mining and processing, economy evaluation, law, mining translation to carry out site due diligence work. After meeting with the local liaison, it took six days for them to do field investigation, check geological borehole data, visit local government and mining service companies. The due diligence team thought that, although the exploration concession and resource reserve was reliable, coal seam occurrence condition was clear, and the market price of coking coal product is high, they still denied the feasibility of this project, submitted due diligence report to management team and terminated the project negotiation timely.
The reason why due diligence team negated the feasibility of this project are as follows:
1.1 There’s restrictive facilities in surrounding that affect the mining activities, in the north part there’s gas main pipeline, in the east part there’s expressway, in the south part it’s railway, in west part it’s high-tension power line, and these facilities don’t have the condition of relocation;
1.2 Coal seam buried depth is 90-130m, if use open-pit mining technology, the stripping amount is too heavy, and there’s scattering residential area, if relocated, the cost will be high; if use underground mining technology, in order to prevent surface subsidence, backfill treatment must be done besides reserve the pillars, which will result in high mining cost and influence the project economic feasibility;
Although this project was not taken over and developed successfully, the due diligence team found the critical defect of this project and prevented the predicament of not economical and feasible development after acquisition.
2. The Exploration Right Project of A Coal Mine in East Australia
In 2013, one grand Chinese State-owned company went to East Australia and took acquisition of 5 coal mine green land exploration right projects from a local primary mining company. To carry out work more smoothly, they selected the board and management team from both Chinese and Australian side, and engaged local Australian geological experts and exploration company to start exploration work, what’s more, they organized special team for community relationship coordination.
This project started geological mapping and drilling exploration from year 2014, the total project investment has exceeded more than 0.2 billion RMB by the end of first half year of 2018, which has exceeded the planned budget for pre-work stage of project development, while still haven’t explored valued great coal mine resources yet, it really has a wolf by the the ears as the saying goes.
Analyzing this case from the very beginning’s contact stage to exploration work after acquisition, we can find the following matters which might resulted in this hard situation:
2.1 The information which provided by the former mining concession holder indicates that, within 2.5 km2 range beyond 15 km of this mining concession, there’s 87Mt proved coal resource, and in surroundings there are other coal mines in operation. However, neither from the information that provided by former mining concession holder nor from the site geological mapping could we find obvious coal seam outcrop, only partial carbonaceous shale exposure.
2.2 From year 2014, although 4~7 layers coal seam were found within 200m burial depth range from some exploration borehole, each coal seam thickness was just about 0.5m, the ash content reached 35%. In the district where has many similar mining companies, they are hard to engage their own survivability, let alone competitiveness.
2.3 In recent years they spared much time and energy in dealing with extension of mining license, geological mapping, exploration borehole, community relationship coordination and mining land reclamation work.
This project is a typical case which the early stage due-diligence work didn’t been carried out well and finally resulted in mining green land acquisition failure. Coupled with sightless hope and didn’t terminate the investment, they were caught in excessive exploration and which finally resulted in increasing loss. Now this project has stopped exploration and is in pending state.
3. A Cobalt Mining Concession Project in North Zambia
At the beginning of year 2018, one famous Private Equity (short for”Institution A”) planned to invest on one unexploited Cobalt mine project (short for “Project B”) in Northwest Zambia 2018, and entrusted us to carry out due-diligence work for them. During the due-diligence work period, we organized a due-diligence team consists of experts from geology, mining, mineral processing, legal and finance major, and led by a team leader who has over 30 years experience in geology and mining field, also engaged in many overseas mining investment projects before.
The owner of Project B has engaged many mining exploration companies and consulting companies to carry out a great deal of exploration work before, also the owner has changed several times, the former documents are complicated. This Cobalt mine project is a famous and unexploited mine in that district. According to the work plan, the team assigned an expert who has many years’ site experience in Africa and with thorough knowledge of mining and mineral processing to be stationed in Zambia site and coordinate work; as scheduling, the other domestic team members analyzed the former documents and made plan for next step site due-diligence work. In the aspect of document analysis, in order to get result of Cobalt ore reserve condition and geology information of hydrology, engineering and environment, the translation and technical analysis ground started translation and analysis of regional geological and topographical general drawing, afterwards they worked on written report and other conclusive data. The site engineer conducted field investigation and communicated with owner at the same time, and give feedback to domestic team member when any important information occurred.
The due-diligence team soon found two crucial problems, one is the hydro-geological condition restricted the possibility of deeper resource, another is the ore body on ground surface leaching thin and scattered, the main mined body trend has small scale. The resource that can be realized scale mining is only 30% of the total resource in geological report. Thus this project could only be open-pit developed in medium scale. The site work in Zambia also verified this conclusion, at last we submitted detailed technology due-diligence report to Institution A, after discussion between Institution A and the owner, they finally adjusted the comprehensive value assessment and development scale, and finally determine this project is a great Cobalt mining project only for medium-small scale.
Although this project’s final conclusion is different from the initial judgement and anticipation, the whole project value is reduced, also development scale is adjusted. But thanks to the involvement of due-diligence, the hidden problems were recognized in time, the management concept is adjusted, which led to a successful and great medium-small scale Cobalt development project, it can be set as one of typical successful case in overseas mining investment project. The reasons why this project could control investment risk and get remarkable R.O.I are as below:
3.1 Investment institution invited and entrusted us to do the due-diligence work timely;
3.2 The due-diligence team consists of experts from major of geology, mining, mineral processing, legal and finance, the responsibilities are clearly divided and managed, with tacit teamwork and cooperation;
3.3 Precisely grasp each stages’ work centrality, arrange the sequence of material translation and analysis reasonably;
3.4 Dispatched a group of well-organized and professional team members with strong verbal communication skills, know how timely and keep efficient communication with client and domestic team, pass and express information effectively;
3.5 Always insist the concept”only beneficial stone could be ore”;
3.6 When facing dispute, each party not only insists the merchant principle, but also communicates honestly. Although the project scale and project value evaluation is reduced, each party reaches consensus soon, and gained mutual respect and trust;
3.7 During the due-diligence period, although the investment institution thinks highly of this project, they never put pressure on the due-diligence team, and it could make the team members keep neutral position and clear mine; The due-diligence team never copy previous experience blindly from very beginning to the end, insists professional attitude based on fact and science.
Conclusion
From the above three cases we could recognize that, although there’re many great mining investment projects, due to the unequal information, many projects might have hidden problems, also because of the specificity of mining investment project, it’s very crucial to carry out due-diligence work by professional institution.
We draw several conclusion about due-diligence work in overseas mining investment project for reference:
* Insist the principle of society labor division”let the profession of professional things”;
* Due-diligence team shall consist of professional team member with all necessary majors, team framework is required, and each member’s responsibility shall be arranged properly, information system shall be”confidential for external, accessible for internal”;
* Know the difference between resource quantity and workable reserve, insist the concept”only beneficial stone could be ore”;
* The due-diligence team shall not have any tendency and shall based on fact and keep neutral always.
* In technical due-diligence stage, one team member who has professional knowledge and is skilled in negotiation shall be dispatched on site to help coordination; in legal, financial and tax due-diligence stage, the ethnic Chinese who knows local issues well is better to be found to cooperate with due-diligence member;
* Knowledge and application skill about international mining capital market operation shall be enhanced, if there’s difficulties beyond ability, external supporting help shall be sourced when necessary;
* Strengthen study about mineral product market and improve the judgement about product price trend and market demand.