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One:Importance
of Technical Due Diligence in Overseas Mining Investment Activities & Related
Case Study
Author：Heng Huang1，Qiang Liu2，Nengjun Yu2
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, planned 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, and 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 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 result 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.
(To be continued at Part two)
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