SELECTING VENTURES & PARTNERS – THE THEORY

There are five stages in JV negotiation. The first involves much of the same homework as SEPA negotiation requires. (See diagram at right.) But there are some important differences.

In SEPAs, Aboriginal communities have no choice over who they are going to negotiate with. They have to deal with the company that has won the rights to the mining property. By contrast, when it comes to JVs that supply goods and services to the mine, there may well be plenty of potential partners to choose between.

An Aboriginal Development CorporationAboriginal Development Corporation: corporation that represents one or more Aboriginal communities and is the entity through which business that benefits the community occurs. that aims to build the self-relianceSelf-Reliance: the capacity of a community to plan and build an economic future that suits the values, priorities, and needs of its members. of its community has to make a strategic choice of both ventures and partners. It has to select only those that will be instrumental – that will perform a specific function – in the achievement of the community's vision.

Venture selection comes first, partner selection second. The ADC identifies the venture opportunities that are viable and aligned with the community’s long-term interests. Only then does it look for a suitable partner. Alternatively, non-Aboriginal companies may make the first move. They may have done enough homework to know if they have an Aboriginal partner, they could be better positioned to win a contract. They then propose a venture to the ADC.

Either way, the ADC will have before it venture proposals to pursue with a partner. The ADC knows it hasn’t the capacity to “go it alone.”

To evaluate the proposals, do three things. First, analyze each one. Make sure the projected numbers for production, costs, 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., and markets add up and overlook no significant factors. (If several proposals have been submitted, competition will have induced the bidders to present their best offers at the outset. The ADC will then have a better idea of the benefits it can realistically bargain for in negotiations.) Second, check over the track record of the companies that made the submissions and the character of their leaders. Third, hire an independent party with expertise and experience in the business in question to carry out Due DiligenceDue Diligence: a financial and technical investigation to determine whether an investment is sound. Each party to a business 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 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., 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.. uses Due Diligence to ascertain the actual quantity and quality of the assets which the others claim they can contribute. on the most promising proposal.

Having identified a promising venture, the next thing is to assess the potential partner more rigorously. Again, it is a 3-step procedure.

1. Determine Their Interest in a Long-Term Partnership

Your community's economy will not be well served by a series of brief, unconnected business deals. Make sure your prospective partner is looking for a "meaningful relationship," and not just a "one night stand."

2. Check Out Their Track Record

Assess the track record of your prospective partner from six points of view. (This is very similar to the SEPA checklist found in Module 4, “Homework #4: Assess the Mining Company,” p. 4-12.)

• Financial Performance: What is their financial performance? What are their gross revenuesGross Revenues: money generated by all of a company's operations, before deductions for expenses, sometimes simply called “the Gross.” and what is their net profit? What is the size of their asset base? How much debt are they carrying?
• Performance against Competitors: What is their performance compared with other businesses in the same industry? What is their reputation among competitors?
• Marketing and Networking Capacity: What kind of market network do they have? What is the reputation of the company in the marketplace as a supplier of goods and/or services?
• Past Performance as a JV Partner: How have they performed as a partner in other JVs? Are there any lawsuits pending due to partnership disputes? Are they considered an honourable partner? Do they keep agreements?
• Experience with Aboriginal Business Interests: Have they any experience in working with Aboriginal JV partners? Check it out, if they do. Likewise, find out more about any experience they have with an Aboriginal labour force.
• Environmental Track Record: If it is a business that potentially pollutes, what is their environmental track record? Are they committed to minimal environmental impact? Check out their record with regulatory agencies.
  Your answers to these questions will not only help you to select a partner, they will inform your negotiating strategy. If your most suitable partner is still less than perfect, for example, terms can be added to an agreement in order to protect the ADC's interests in very specific ways.
   

3. Understand Their Short Term Interests in the Business

Your partner may have other interests that need clarification. For one, companies have shareholders to whom managers are answerable. Those shareholders almost all have an overriding interest in earning a healthy return on their investment. You can assume, therefore, that any partner will want to make money.

Their interest in you may reflect other, more specific interests of theirs. For example, a heavy equipment company may be looking for a way to cover the costs of servicing the debt on some underutilized vehicles. This goal could be met by simply keeping the equipment working, and not by generating profits. Without careful assessment and negotiation, their short term pain could compromise the long term gain of an Aboriginal JV partner.

You really have to check out your prospective partners. No matter how warm and fuzzy you may feel in the presence of a charming personality, always check out their credit worthiness; their history of financial dealings; their relations with other partners; and their performance within the industry. You have to know the liabilities as well as the strengths they would bring to a deal.

I remember one deal that Kitsaki was considering. In the process of checking our prospective partner out we discovered some very interesting things.

We discovered they had Gross Revenues of several hundred million a year, yet their net profit was about $1 million. That told me right away that their performance was either really pitiful, or they were hiding profits. The quality of their relationships with other partners wasn't encouraging either. They were embroiled in lawsuits with at least a couple of firms. Aside from being inefficient, evidently, they were hard to get along with. Maybe they weren't honouring their deals.

This all caused us a great deal of concern. Had it been up to me, I would have turned them down. But the chief said to make a deal. So Kitsaki was obliged to structure a deal it could live with. We had to protect ourselves from what appeared to be poor management and relationship habits. Then, in order to bind them to the deal, we had to sell them on the quality of the relationship we could offer. Now that chief operated on the basis of trust. When he shook your hand, you had a deal. He stuck with it. You stuck with it. Fortunately, that was exactly the sort of qualitative thing which gave us the advantage.

Three years later, when we were all fat and happy, we had a meeting with the president of our partner firm. He said, "You know, we were really worried about you guys." (As if we weren't worried about them!) "If we'd known then what we know now, we would never have hesitated. You're the only partner we've got that isn't waiting to stab us in the back. You're the only partner who is determined to add value to the deal."

In other words, they had come to see us as honourable partners. I have to say that they had earned our respect as well.

If this investigation affirms that this is the partner for you, it’s time to carry out a Feasibility StudyFeasibility Study: a study of a proposed project’s product or service, market, competition, organization, and finances to determine if it can make a profit. on the venture. With that in hand, proceed to negotiate the Heads of AgreementHeads of Agreement: a non-binding summary of the main issues on which the parties intend to base an agreement..