Article by Fraser McGill

True value occurs when the benefits can be felt by all stakeholders in any venture. This makes mining an investment of great potential. When the transaction is managed with real data, expert advice and the greater outcome in mind, the value that expands from a mining endeavour is an ongoing asset.

The value of a mining asset and the ability to generate value, is different in different hands. One needs the ability to create more value than the current party and therefore be able to apply an alternative operating philosophy. Value generation is also more likely if the purchaser has a better understanding of the target and a clear plan of how it will be integrated into the company.

Join the possibility venture of mining assets.

Global exploration budgets for non-ferrous commodities have systematically reduced to half the peak 2012, and projections for 2020 were flat in line with 2019 spending even prior to the Covid 19 break-out.  The perceived weakness in the mining industry would however not curb the demand for commodities, and a window of opportunity to expand your portfolio exists.

Successful acquisitions, project execution and integration require extensive industry experience, an understanding of how synergies could be created and an understanding of the “levers” that generate value. When conducting due diligence, the purchaser must also have a well-defined strategy and a plan to realise value.

How to ensure value

Most consultants follow a tick-box approach to assess various areas of the due diligence; but in our experience, Boards and Financiers require assurance regarding the following key questions:

• Do we understand the remaining value of what is in the ground?

• Can we mine and process it in a cost-effective manner?

• Can we add more value than the current owner?

• Will the acquisition make our existing business more valuable?

• Does this make sense in the broader external context (e.g. corporate strategy, commodity markets, local competitiveness, etc.)?

• What is the likelihood that we get the required returns to justify our investment?

• To conclude, what is the exposure to risk; for the company and financiers?

A methodical approach includes a holistic review of the target to ensure that the necessary insights are gained. 

• The Strategic Rationale of the purchaser needs to be understood, to align goals with aspirations. 

• An Enterprise Scan will uncover insights on the operating environment, historic operational and financial performance, peer comparison, cultural fit and constraints. 

• Finally, the Baseline can be established to consolidate forecasts and business plans for current operations.   

Effective transaction support is essential

With the setup done, the gaps are identified, and the adjustment of business plans are possible. The levels for value generation that benefit all stakeholders and optimizing low-hanging fruit can be effectively identified.

Framing of the Strategic Rationale, Enterprise Scan and the Baseline in workshop format allows the quantification of opportunities not always found in the business plans – those opportunities that would allow upside benefits in the purchaser’s hands. 

The upside opportunities’ outcomes should be considered too, which is ultimately consolidated into the purchaser’s business plan with a clear valuation to assess the extent of value creation or destruction.

At Fraser McGill, our approach is comprehensive, and risk focused, and is built on our extensive industry experience, spanning 100 projects and 14 different commodities.  

We provide a confident view on potential deal structures, organisational structures, and operating models.  We recommend a roadmap for the due diligence process and a high-level view on pre and post-merger strategies. We’re always available to advise and can assist you to identify opportunities suited to your needs. 

Start the conversation. Call Rob McGill +27 (0) 82 780 3587 or Cobus Fraser +27 (0) 82 658 4773