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Panel puts due diligence under the microscope

PERTH, AUSTRALIA - 26 October 2017 -  A high-calibre industry panel of experts has probed the often-sensitive topic of external due diligence reviews before an audience of about 100 miners and advisors at an event hosted by leading consulting firm SRK.
The forum in Perth, Western Australia, focused on the ‘Lemon Problem’, and the vital asset and business appraisal step of due diligence sometimes seen as a “bother … or something that must be tolerated”, audience members heard.
While it offers potential for valuation improvements, due diligence is a process that can frequently be scary for companies, according to panel member and veteran mining industry executive Mike Young. Young, currently managing director of uranium explorer Vimy Resources, took junior iron ore producer BC Iron from discovery drill-hole to first production in under four years. He says he has seen his fair share of due diligence investigations.
“I look at it [due diligence] as a reality check for my team,” Young said. “It’s a way for independent experts to come to your company with a fresh set of eyes and have a really hard look at what you’ve done.
“Every time we’ve had due diligence done it’s been really good so I am not scared of it. I don’t think anyone should be scared. I think if a new group of people come in and they are experts and they point out holes in the work you have done, that’s a good thing.”
Five key industry figures headed the October 12 panel, part of a unique spotlight series run by SRK to bring together investors, financiers and mining professionals to better understand industry topics and promote parties cooperating to improve working relationships. Previous panels focused on geology and exploration, and mining in Africa.
Chaired by SRK Australia’s managing director, Chris Woodfull, the latest discussion included a focus on improving transparency and ensuring high levels of accuracy in due diligence information to ensure the best possible results for all parties in the transaction.
According to panel member SRK’s Iestyn Humphreys, “participants in the mining and metals sector are, by necessity, optimists who operate in an environment where risks need to be managed and that defines why we are all passionately enthusiastic about the subject”.
He said it was “not a perfect world” and that there was a need to recognise the challenges faced by companies in raising capital in the current economic climate.
“Sometimes when reviewing a vendor’s base case, it becomes apparent that it includes ‘everything but the kitchen sink’, the challenge therefore is to understand the building blocks that underpin value and establish what upside the acquirer is prepared to pay for.
“When participating in a multi-bidder, multi-stage deal there is always a temptation for parties to start to ‘play poker’ with the data which, in reality, just gets in the way so always be aware if the vendor’s advisor says, ‘well, that’s all the information we are prepared to share with you for now’,” he said.
During the panel discussion, highly regarded emerging lithium producer, Pilbara Minerals’ chief financial officer Brian Lynn, said his company employed the services of SRK to produce its own due diligence report for use in the European debt market.
“Lithium is not a well-known commodity for the investment community, particularly on the debt side, so we tried the traditional project financing route and we were unsuccessful there, so we needed to look at other sources of debt,” Lynn said. “We had to do our own due diligence, so we had to understand our assets, and understand our risks, and build our own case. In the end we took this case to the European debt market and it was important that we not only were able to sell our case, but make sure the investors could be educated as well.
“We sold the story, but what was even more important was those particular investors were then doing due diligence on us and could see the information we had provided to them had enough gas in it and no holes in it, and therefore you could get a deal done. If there were gaps in it, this would have provided those investors with the opportunity to walk away or change the deal. They have a lot of other places to put their money, so you only have one shot at it, and if you don’t do the due diligence right, you can lose potential investors.
“Having a proper report from a credible consultant was really useful. We found this process ran very well.”
Deloitte partner and national mining leader Nicki Ivory said miners could often put too much focus on technical matters, which of course was very important, but there were many other factors that could influence the value of a mining company.
“In the mining space we tend to focus on the technical side, but in fact you can get tripped up from other skeletons in the closet: these might be financial, or tax, or environment, so it’s really important to think across the spectrum. So it’s everything around the company that you need to know to confirm your view on the value of that company or asset you are looking to buy,” she said.
“So, I would encourage everyone to think of this as an integrated process. You have to be very clear about what you find and make sure you get all the right disciplines in and get all those disciplines talking to one another; and by integrated, I mean someone is actually taking all the information from everybody and assessing it holistically.”
Simon Price from Azure Capital talked about not making it a one-size-fits-all approach.
“There’s a big difference between a lemon asset and a lemon transaction,” he said.
“Not all situations have the same motivations. The biggest driver in value in most transactions in this sector is the commodity price assumption and foreign exchange, and all the economic numbers being used. It’s obviously critically important to get that right and often what looks good in hindsight is more due to luck. It doesn’t change the fact that you should still try and control the things you can control. Meaning proper due diligence and properly understanding what you are getting into, not bringing cultural bias into it etc.”
According to Humphreys, “an aspect to recognise is that mining is not risk free and that the role of due diligence is to highlight such risks and seek a collective way forward to manage these through developing consensus between the interested and affected parties where practically possible”.
“It should not be a never-ending process in search of the perfect risk-free project. Companies’ funds are limited, so there are always compromises to be made in defining those elements which categorise as conditions precedent and conditions subsequent.
“You need to define the key risk factors your client wishes to focus on and add to these as appropriate. It’s an interactive process; a process that evolves and sometimes you need to make judgement calls to address the unexpected.”
But, do buyers look hard enough at a project?
“I think some cultures do less due diligence than they should,” Ivory said. “And some acquisitions in this state [Western Australia] over the past decade have turned into lemons because they didn’t do enough due diligence. They took the approach that it will be okay.
“I think the important thing is not to get too vested in something. You go so far down the line and you feel you can’t pull out even when the findings in due diligence say you really should be pulling out or dropping your price. People can get really vested in a deal; that’s a real challenge, a real human challenge.”
Price agrees. “Focus on what’s important, spend your time well, and work out those 5 to 10 most significant things you need to know and why you need to know them and how you are going to use that information. Generally that will determine the course of the due diligence.”
Forward planning is a must, says Lynn.
“Plan your due diligence upfront and think through exactly what you are trying to achieve so you are not chasing a rabbit down a hole; think what’s important to the deal. Once you have decided that, coordinate an approach and always validate the information you look at,” he said.
“I have seen plenty of financial models that look beautiful and present well on paper, but when you start looking at the numbers they are flawed because someone hasn’t actually checked the model.”
Media enquiries:
Nicole Belbin, SRK Consulting, T: (08) 9288 2000 F: (08) 9288 2001, E:


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