One: Importance of Technical Due Diligence in Overseas Mining Investment Activities

2018-11-07 0 Views (38)

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


One: Importance of Technical Due Diligence in Overseas Mining Investment Activities & Related Case Study

Author:Heng Huang1,Qiang Liu2,Nengjun Yu2


Introduction

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.  


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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.

 

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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.

 

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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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