Given the wide and growing range of risks faced by mining projects, it is increasingly vital for shareholders and financiers to get expert and independent corroboration on mining resources, plans, valuations and other aspects of each venture. This is best done through a detailed due diligence study, a critical phase that underpins the future success of the mining industry.
According to Joseph Mainama, partner and principal mining engineer at SRK Consulting, a common purpose of conducting due diligence is to support mergers and acquisitions. The process involves assessing the risks associated with an operational asset or project, to ensure that the transaction is informed and well-considered.
“Stakeholders really need to understand – in some detail – what the risks are in the operational asset or project that they are targeting,” said Mainama. “Anyone conducting a quality due diligence study must therefore have insight into the many key facets of mining projects – so that the feedback can usefully inform decisions about the transaction.”
The due diligence study therefore examines the findings of the technical studies that have already been carried out, and interrogates them for any potential shortcomings. He noted that there are many aspects to consider, from reserve estimations and mining plans to geotechnical and groundwater issues.
Risks undermine viability
“If the risks in areas like these are not fully identified or are miscalculated in some way, they have the potential to derail a project or to undermine its viability,” he said.
Marcin Wertz, partner and principal mining engineer at SRK Consulting, highlighted that the central aim is to establish the veracity of the information on which investment decisions are taken.
“The buyer and seller in any transaction will be wanting to optimise their positions, and they need to be certain that they share a common faith in the project data and plan,” said Wertz. “That is why it is important to have independent experts involved who have no vested interest in the project going ahead or not.”
Multiple disciplines
The broad range of such an assessment requires that it is multidisciplinary in nature, explained Jaco van Graan, associate partner and principal mining engineer at SRK Consulting. The due diligence process involves gathering and reviewing all available data, with parallel workflows where various disciplines examine the information simultaneously.
“A key initial step is to assess the mineral reserves, by verifying the resource and ensuring its accuracy,” said Van Graan. “If the resource geologist encounters an issue in what was reported, they will need to recommend adjustments.”
Geotechnical engineers need to consider how rock stability will influence the reserves, and geohydrologists will check how the groundwater issues will affect the mining plan. Process engineers in turn examine whether the ore is as amenable to processing as the project authors claim.
Setting up for success
“The mining process is complex and must be facilitated by the appropriate skills and resources,” he said. “A due diligence must therefore also consider the organisational structure that is proposed, and the required logistics for mined and processed ore to reach the market. This means evaluating factors like the project’s human resources organogram, its choice and scale of equipment, energy availability, and waste management.”
Potential liabilities also lie in the environmental and social arena – including rehabilitation and provision for closure, in addition to the broader social responsibilities of the project and its engagement with communities and other stakeholders.
It is also important to allow sufficient time to conduct a due diligence properly. While the timeline involved in deals is often short, critical risks can be overlooked if the due diligence is unduly rushed. Each discipline should have adequate time to properly gather and consider the information, and access to the site is invaluable in this process.
He highlighted that the variety of factors underlines the need for a due diligence to be comprehensive – so a professional team has to work in close collaboration to ensure all factors are considered in their relationship to each other. Only in this way can a realistic view of a project’s potential be achieved.
Collaborative practice
“An example of how this collaboration is required is where a clay layer and underground water is identified in the mining area,” he said. “Working together, a geologist, geohydrologist and mining engineer could identify the risk involved in mining above the clay layer – which could cause groundwater pressure from below to break through the clay and compromise the area’s water supply to surrounding communities.”
The insight that goes into a due diligence assessment is based heavily on the operational experience of the professional team, said Mainama.
“The opinions that are offered must normally be imbedded in the professional credibility that comes with extensive experience,” he said. “It is only with years of work inside mining operations that you understand how mining actually gets conducted.”
Scoping correctly
Wertz noted that it is crucial for clients to scope a due diligence study correctly, and not to be selective about which aspects to review. All disciplines in the due diligence team should have extensive experience in various phases of feasibility studies, so the team has a comprehensive understanding of the factors affecting project viability.
“Assessing risk is not just about looking at mining and processing methods, but also includes critical aspects like the tailings facilities,” he explained. “A mining plan also cannot be assessed fully without understanding groundwater conditions, for instance, as this is likely to affect the design slope of the pit.”
If a company’s procurement department is tasked to compile the scope of work, they may require the support of technical experts to ensure that the due diligence identifies all the risks. Wertz pointed out that experienced due diligence teams can guide clients on ensuring that the scope of the due diligence adequately covers the outcomes it is meant to achieve. These studies can add significant value and are usually a fraction of the overall transaction cost.
Mineral reporting codes
Mainama highlighted that a mining due diligence also has to assess whether a project proposal complies with the accepted mineral resource and reserve reporting codes.
“In the case of South African projects, we use the local codes for reporting of exploration results, mineral resources and mineral reserves (SAMREC), and for the reporting of mineral asset valuation (SAMVAL),” he said. “We can only declare a reserve after a pre-feasibility study – at least – has been completed.”
He explained that the mineral resource estimation itself needs to be checked and verified, followed by the application of the relevant ‘modifying factors’ such as: geology; geotechnical conditions; mining engineering; utilities and logistics; environmental, social and governance (ESG) factors; infrastructure and logistics; and marketing.
“The valuation of the project can then be more accurately assessed, given the risks identified and the costs associated with mitigating those risks,” he said. “This valuation is of course critical to the whole due diligence exercise, as there has to be a business case to support the project’s progression.”
Supporting mining in Africa
Mainama noted that, judging by the agenda of the upcoming Investing in African Indaba in Cape Town, due diligence would undoubtedly form part of the narrative in future proofing the African mining industry.
“The Mining Indaba is a great opportunity for discussions between various disciplines on how to ensure the future success of mining projects,” he said. “We look forward to discussions with visitors about their strategic or technical challenges, and to exploring solutions that will support the future of the mining industry.”
