HOMEWORK #4: ASSESS THE MINING COMPANY

By this time, you know what benefits an agreementAgreement: any explicit, signed document that is negotiated and includes mutual concessions or limitations placed on both sides. Examples are Negotiation AgreementsNegotiation Agreement: an early agreement in the mining process, likely to occur in the Exploration Stage, which would outline the basis of the relationship between the Aboriginal group and the mining company and how the relationship will evolve if the mine moves forward. , Exploration Cooperation Benefit Agreements, Socio-Economic Participation AgreementsSocio-Economic Participation Agreements (SEPAs): private, confidential contracts between Aboriginal communities and resource developers, like mining companies. SEPAs specify how the communities that will be affected by the development of a resource will also benefit from that development. Many SEPAs include terms about the employment and training of Aboriginal people, compensationCompensation: something (such as money) given or received as payment or reparation (as for a service or loss or injury). payments, protection of the environment, and profit-sharing. SEPAs are often called Impact Benefits Agreements (IBAs) and Cooperation Benefit Agreements (CBAs), and other names. The Aboriginal Mining Guide calls them all SEPAs.. could generate. You also know which benefits you want to target. The next job is to determine if the company in question can, in fact, deliver those benefits to your community. You deepen your understanding of the character of the company, how it is positioned in the industry and what its prospects are. This will help you understand how best to deal with the company at the negotiating table.

It is vital to know about the previous work and experiences of a mining company (its “track record”). You need to know the company’s strengths and weaknesses as well as the perspective it will bring to negotiations. Without this solid understanding of the company and the mining it wants to do, you cannot design an effective negotiating strategy. Here are the key questions to which you need answers:

What is the company’s past financial performance?
How well has it performed against competitors? Is it a leader or a follower? Is it relatively small or is it a big, international firm?
If it is relatively small or new, what experience do its directors and managers (its “principals”) have? Where did they work before? What did they learn from that experience?
What is its reputation among other companies in the mining industry?
How responsibly has it treated the natural environment in the past?
What has been its experience with SEPAs or JVs? What is its reputation among Aboriginal communities?
What is its reputation among communities in general? Has it a history of supporting infrastructureInfrastructure: the basic facilities, equipment, roads, transmission lines, sewage, water, and other installations needed to support the functioning of a mine. development or community economic development?

The point of this research is to try and understand the credibility of potential partners. Does the company’s track record show a history of long term and stable relationships? Or has it a reputation to “love ’em and leave ’em”? Does it stick to its agreements or break them at the first sign of trouble?

This isn’t about looking for past failures. Every company will have had good times and bad times. But it is important to find out how a company has faced failure and grown from that experience.

The name for this process of investigation is Due DiligenceDue Diligence: a financial and technical investigation to determine whether an investmentInvestment: the purchase of a financial product or other item of value with an expectation of favourable future returns. Generally, “investment” means the deliberate use of money in order to make more money. is sound. Each party to a business agreement uses Due Diligence to ascertain the actual quantity and quality of the assets which the others claim they can contribute.. There are two main phases to Due Diligence. The first can be undertaken when it is clear which company will be the owner of a mining property. (Juniors often explore a property, but rather than develop it themselves, sell it to another mining company with greater resources and experience. See Module 2, “Exploration StageExploration Stage: the whole range of activity from searching for and developing mineralMineral: A naturally-occurring, homogeneous substance that has a definite chemical composition and (usually) a crystalline structure. deposits.,” p. 2-5.) The second phase of Due Diligence can be undertaken once a Bankable Feasibility StudyBankable Feasibility Study: a comprehensive analysis of a project's economics that banks and other financial institutions can use to make investment or lending decisions. is complete.

Due Diligence Phase 1: Get The Basics

Among the most important sources of corporate information for the first phase of Due Diligence are the securities websites of governments. In order to raise money by selling shares on the stock market, companies must post key information about their ownership, structure, and character on these sites. For companies listed on the Canadian stock exchange, go to www.sedi.ca. For companies listed on the United States stock exchange, go to www.sec.gov. From these sites you can view or download such company reports as:

the Insider’s profile
the Issuer’s profile
a summary of reports that the company compiled for the securities regulation authorities

From these reports you can draw the following types of information:

a company overview, including what the company does and its basic principles.
a list of people on its Board of Directors
any regulatory or licensing problems it may have had
the company’s record (positive and negative) regarding the law
legal issues concerning the company’s relationships or any legal judgments that the company has experienced.
how the company operates, the projects in which it has been involved, and how these have unfolded.
trading and public record information
conflicts of interest and other insider trading information

Mining industry journals and internet searches are another way to get information about the company. These information sources may offer the views and analyses of other players in the mining industry, including some who can comment critically on the company’s business or social and environmental performance. You might discover if the company has engaged or is engaged in mining activity involving other Aboriginal communities. Make a note of the names of people, organizations, and communities cited in these sources. You can follow up with them for clarification or for more in-depth interviews.

Make sure to organize your research material well and to keep track of all your sources of information. Then you will have no trouble finding data or going back for more data as you do your analysis.

Due Diligence Phase 2: Analyze the Bankable Feasibility Study

Due Diligence on a company and the mining project it wants to undertake must include an analysis of its Bankable Feasibility Study. That analysis should focus on seven things.

1. Engineering and Geological Elements

The study’s engineering and geological data are going to say a lot about the mine’s potential profitability. The size and richness of the ore bodyOre Body: a mineralized mass whose characteristics and economic limits have been examined. will be described in detail. This will indicate the quality and extent of discoveries to date. So will the study’s explanation of the options and costs for actually developing the site.

The engineering and geological data also are very important for determining the best way to extract the ore. If it is close to the surface, open pit mining is a likely development strategy. If the ore body is deeper, an underground mine or combination of surface and underground mining may be necessary. This option carries it with far greater costs. (See Module 2, “Stage 4: Mine Operation,” p. 2-29.)

Similarly, the concentration of the ore body will have a big impact on processing costs. Ore with a higher percentage of marketable commodities and less waste (“high gradeGrade: the quantity and quality of metalsMetals: one of more than a 100 basic earth elements, grouped under minerals. Includes iron, lead, zinc, and copper., diamonds or other minerals. ore”) is going to be much more profitable to process than a low grade ore. Similar energy and equipment will produce a much greater volume of marketable product from high grade ore than from low grade ore. The costs of waste management and reclamation will also be projected in this part of the study.

2. Markets and Prices

Engineering and geological data provide a foundation for understanding a mine’s output and costs. But to get a clear idea of its potential profitability, you also need to know where the product will be sold, how its selling price varies, and what effect that variation could have on the viability of the mine. Mining produces commodities (gold, zinc, lead, molybdenum, etc.) that are sold in a global marketplace. (See Introduction, p. Intro-2) Prices in that marketplace can rise and fall steeply over short periods of time. The range over which the price of a particular commodityCommodity: physical substances, such as metals, that can be sold or exchanged in a marketplace. varies, and the market forces that cause the price to change, are additional clues to the viability of a mining project.

In addition to the Bankable Feasibility Study, market information for mining commodities can be found through mining and industrial associations and in trade journals, Nonprofit “watchdogs” of the mining industry are another possible source. Here are some examples:

Mining Association of Canada: www.mining.ca
Infomine, Mining Intelligence and Technology: www.infomine.com
Prospectors and Developers Association of Canada: www.pdac.ca
Miningwatch: www.miningwatch.ca

Many of these websites offer links to additional organizations of a similar nature.

3. Transportation

The cost of transporting the ore from the mine for further processing is another important topic that the Bankable Feasibility Study will cover. You need to know how far and by what means the ore must travel from the mine to the rail head or port. Consider all the inputs and infrastructure that transportation involves: roads, trucks, bridges, fuel consumption, etc. They will tell you something about the cost of mining and about the range of downstreamDownstream: downstream business refer to suppliers of products and services such as exploration, production, processing, product development, technical services, marketing and sales that supply the mine but are not owned by the mine. contracts your Aboriginal community may want to target.

4. Energy

Mining is energy intensive. The location, the type of mining, and the processing involved all affect the amount and type of energy required. How much energy will be needed? How will it be produced? If electricity is required, is the supply available adequate to the mine’s projected needs? Will new power lines need to be installed? If diesel fuel will be required to run a generator, how far must it be hauled? Perhaps liquid natural gas will be an alternative. If so, it will first have to be shipped to a port or other location with the facilities for handling this type of energy.

Much of the information pertaining to the mine’s energy supplies will be found in the Bankable Feasibility Study. What may require a closer look is the mining company’s projection of increases in the price of energy and how they might affect the mine. Two things need to be looked at.

First, what are the company’s assumptions about energy prices? Oil and gas production is considered to have reached its peak. From this point forward, production of these fossil fuels will fall further and further behind consumer demand. Their prices can be expected to rise significantly. This is a key risk in any business but especially to energy-intensive businesses like mining. Jeff Rubin, former chief economist for the Canadian Imperial Bank of Commerce, is well-known for the accuracy of his predictions in energy pricing. Rubin thinks oil prices will reach $225 per barrel by 2012, nearly four times their level in August 2009. He may be wrong. But give it some thought. How profitable would this mine be if fuel prices were to triple in the next five years?

Second, does the company project the impact that penalties for carbon emissions could have on the mine’s costs? Carbon dioxide is one of the primary “greenhouse gases” that is causing climate change. Companies whose operations emit carbon dioxide should well expect to pay a price for it in the near future. Mining companies that get their electricity from diesel, oil, natural gas, or coal may be charged per tonne of carbon they emit. Alternatively, they may be subject to a carbon tax, as in B.C. Or, they may be obliged to pay both a charge per tonne of emissions and a carbon tax. Does the Bankable Feasibility Study show any awareness of these possibilities? If it does, what costs does it project? If it does not, be sure to ask the company why.

5. Financing

The Bankable Feasibility Study should also explain how the company expects to finance the mine. You want to learn how much the company has invested to date. To cover the costs of development, does the company intend to use its own equityEquity: the dollar value of what a person or organization owns (as opposed to debt, which indicates what a person or organization owes). A person or organization can have an equity interest in something if they have part or full ownership., and if so, how much? How much, if any, do they intend to raise on the stock market? How much will they have to borrow to construct the mine? How much working capitalCapital: cash, property, equipment, services, and contracts or leases. do they expect to need for start-up and for operations?

The answers to these questions will enable you to understand the mine’s projected financial structure. This in turn will help you to see where the company is strong financially, and where it is vulnerable. This information could be important in the design of your negotiating strategy.

6. Employment and Contracting

The Bankable Feasibility Study will outline the projected size of the workforce and the various types of worker that will be employed. It should also indicate what aspects of mine operations may be contracted out. Lastly, it should indicate the extent to which the company is thinking about Aboriginal community(ies) in the project’s vicinity and the role they might play in its development.

7. Assessing Impacts on your Community

SEPAS often include fixed cash paymentsFixed Cash Payment: a fixed amount of money that a Benefit Agreement stipulates to be paid out to Aboriginal communities or organizations in compensation for a mining project taking place in their traditional territory. to cover the costs of the impacts that a mine has on the community. For example, the mine may damage the livelihoods of trappers or hunters, or it may harm community life or the environment. The Bankable Feasibility Study may shed some light on the impacts that the company expects the mine to have on the community. Once you combine this information with other research and traditional knowledgeTraditional Knowledge (TK): the knowledge, observations, and understandings about the natural environment, and about the relationships between living beings and their environment, that Aboriginal people have accumulated over many generations. , you will have a better idea of what impacts are likely to occur and how the community might be compensated for them.

Note: Many Aboriginal communities do not have the experience yet to assess all these factors on their own. They require assistance from people who have brought mines into production and thoroughly understand the mining industry. Their advice can cost $100-200 per hour. Make sure to budget for this work and secure the necessary resources from internal sources, from government, from industry, or from some combination of the three.

See Appendix 3, p. App-16 for a detailed list of items to include in Due Diligence.