due diligence in mining transaction

purposes and processes

Business Contract Drafting

FHUI March 20th, 2011
 purposes

Understanding the mining operations and business of the target

Understanding the potentials of the mining targets: mineral resources

that are potentially valuable, and for which reasonable prospects exist
for eventual economic extraction.

Mineral reserves or Ore reserves that are valuable and legally and
economically and technically feasible to extract

Mineral reserves are resources known to be economically feasible for

extraction. Reserves are either Probable Reserves or Proven
Reserves.A Probable Ore Reserve is the economically minerable part
of Indicated, and in some circumstances,a Measured Mineral
Resource. It includes diluting material and allowances for losses which
may occur when the material is mined. A Probable Ore Reserve has a
lower level of confidence than a Proved Ore Reserve but is of
sufficient quality to serve as the basis for decision on the
development of deposit.A Proven Ore Reserve is economically
minerable part of a Measured Mineral Resource. It includes diluting
materials and allowances for losses which occur when the material is
mined
 purposes

A Proven Ore Reserve represents the highest confidence category of

reserve estimate. The style of mineralization or other factors could mean
that proved Ore Reserves are not achievable in some deposits

Understanding the future and going concern of the target

Understanding the regulatory, business, political and social environment

of the mining business

Assessing risks (hidden or exposed) and opportunities in mining business

Understanding the history, culture and values of the target

Understanding the management style of the target

 purposes

Understanding the strength and weakness of the branding of the target

Reviewing and assessing the assets and goodwill of the target

Reviewing and assessing the liabilities of the target, exposed and hidden

Understanding the stakeholders of the target

Obtaining the real value of the target

Mapping issues that may be used as tools for negotiation

As part of the decision making process

Compliance and application of good governance

 processes

Sealing the meeting of business mind

Prepare and sign indicative agreement to include due diligence

process; determine the scope of due diligence

Negotiate and sign non disclosure agreement

Determining access to data room

Setting up a solid team work: management, lawyers,

accountants, financial advisers, technical experts, tax advisers,
human resources experts, communication experts

Setting up programs, schedule, distribution of responsibilities,

logistics, resources, support systems, reporting systems,
decision making systems, etc
 the coverage
Corporate history, establishment, capital structure, sources
of capital, payment of capital, types of shares, legal and
beneficial ownership of shares, claims or potential dispute on
companys ownership, pledge, encumbrance and attachment
on the shares, shareholders, commissioners and
management material decisions for the past 5-10 years

Investment, business and operational licenses; duration and

ability to extend licenses, dependency on certain licenses,
risks of not being able to extend licenses, regulatory trend on
material licenses, breach to requirements of the licenses,
potential of revocation of licenses, assignment of licenses,
value of licenses, etc

The future of the target in the organization of the acquiring

party; how it would fit in
 the coverage

Review on the assets, quality of the assets, sustainability

the assets, risks that may affect quality of the assets,
claims and liabilities arising from the assets, mobility of the
assets, valuation of the assets, technology of the assets,
ability to replace the assets to support operations, ability to
use assets for financing purposes, etc

Funding ability, access to financial markets, acceptability in

the financial industry, ability to refinance, alternative of
financing

Review on the liabilities of the company, exposed or hidden;

forms of liabilities; ability to contain or limit liabilities;
 the coverage
Review the systems, programs, SOP, governance adopted and
applied in the target company, and how it would fit in with the
ones adopted and applied by the acquiring party

Review the organizational structure of the target company and

how it would effectively carry out the mission and programs of the
target company

Review the management style of the target company and how it

would effectively bring it to the goals and targets of the company

Review conflict of interests and affiliated transactions

Review the decisions made by the management, commissioners

and shareholders that may affect the going concern, profitability
and value of the target company
 the coverage
Review all contracts, agreements, commitments, and
statements to public, customers, government and other
stakeholders, and analyze how it would affect the target
company, its going concern, assets, profitability and value

Review insurance and other protection coverage on the

target company, its assets, management, and employees

Review claims, potential claims, litigation, arbitration

proceeding and other dispute settlement that may involve
or affect the target company, management, shareholders,
assets and value of the target company

Review the intellectual proprietary rights owned or used by

the target company, and how it would affect the operations
of the target company in the long run
 the coverage
Review the human resources condition, form of employment,
employment terms, collective labor agreement, relations with
the labor union, compliance of labor regulations, work safety
and health, etc

Review marketing and sales, marketing network, terms of

engagement with distributors, dealers, sellers; level of
collections, bad debts, etc

Review supplies and its engagement with suppliers, financing

of supplies, payment terms, procurement systems, etc

Financial performance, production and sales, profitability,

risks factors and assessment, cost of production, sales and
operations, dividend policy and history of dividend payments,
investors satisfaction, etc
 the coverage
Review operations of the target company, manufacturing
processes, risk factors and how to deal with it

Review transportation issues, safety, liabilities, and

outsourcing

Review sub-contracting, quality control, liabilities, insurance,

compliance

Others as maybe relevant or triggered from the on-going due

diligence
 Due diligence exercise
ABC Corp., a holding company in the US plans to expand due to
limitation of resources in its home country. It targets mining
companies in Indonesia for the purpose of supplying its customers in
Japan (tin) and India (coal). The contracts to supply its Japanese
customers are for a long term supply, and for the coals are one time
contracts. For the tin resources, ABC Corp., targets Perusahaan
Daerah DEF, a company operating in an offshore area of Belitung
Island, and for the coal resources, it targets CV GHI, a local company
owned and run by the family of local Bupati. The long-term contracts
with Perusda DEF are based on a price agreed 15 years ago, and the
mining licenses of Perusda DEF will expiry early 2014. Perusda
indicates that it wishes to extend the contracts only if the price is
adjusted with fair market price plus premium of 10%. It comes to the
knowledge of ABC Corp., that the premium will not booked as income
of Perusda DEF, but will be distributed to the directors and
commissioners of Perusda DEF as performance bonus. They are also
public officials of Kabupaten where the mines are located.
Please brief your client, ABC Corp., the focus of your due diligence!