S
adly the Lemon Problem does not
refer to the challenges of cutting a
suitable wedge of the fruit for a gin
and tonic or slicing the peel just right
so it curls perfectly to garnish a shaken-not-
stirred vodka martini. Instead it refers to the
trials and tribulations of not doing proper
due diligence.
h e panel discussion was part of a
spotlight series run by mining consultant
SRK Consulting.
Nevertheless, the topics covered by the
panel are valid ones.
SRK’s Iestyn Humphreys said miners
could become passionate about a project.
h at passion can be good but can also lead
to a lack of objectivity about it.
As Humphreys pointed out, miners were
by nature “optimistic”.
At er all, they make their money going
at er hard to i nd minerals in increasingly
challenging conditions. Perhaps optimistic is
not a strong enough term.
Humphreys said it was “not a perfect
world” and there was a need to recognise the
challenges faced by companies trying to raise
capital.
“Sometimes when review a vendor’s
base case it becomes apparent it includes
everything but the kitchen sink,” he said.
“h e challenge therefore is to understand
the building blocks that underpin value
and establish what upside the acquirer is
prepared to pay.
Pilbara Minerals chief i nancial oi cer
Brian Lynn said his company used SRK to
produce its own due diligence report for use
in the European debt market.
“Lithium is not a well-known commodity
for the investment community, particularlyon the debt side, so we tried the traditional
project i nancing route and we were
unsuccessful there, so we needed to look at
other sources of debt,” Lynn said.
“We had to do our own due diligence,
so we had to understand our assets and
understand our risks and build our own case.
“In the end we took this case to the
European debt market and it was important
that we not only were able to sell our
case, but make sure the investors could be
educated as well.
“We sold the story, but what was even
more important was those particular
investors were then doing due diligence on
us and could see the information we had
provided to them had enough gas in it and
no holes in it, and therefore you could get a
deal done.”
Deloitte partner and national mining
leader Nicki Ivory said miners could ot en
put too much focus on technical matters.
She said while technical details were
important, there were other factors that
could af ect a mining company’s value.
“In the mining space we tend to focus
on the technical side but in fact you can
get tripped up from other skeletons in the
closet,” Ivory said.
“h ese might be i nancial or tax or
environment so it’s really important to think
across the spectrum.”
Azure Capital’s Simon Price warned about
taking a one-size-i ts-all approach.
“h ere’s a big dif erence between a lemon
asset and a lemon transaction,” he said.
“Not all situations have the same
motivations. h e biggest driver in value
in most transactions in this sector is the
commodity price assumption and foreignexchange, and all the economic numbers
being used.
“It’s obviously critically important to get
that right and ot en what looks good in
hindsight is more due to luck.
“It doesn’t change the fact that you should
still try and control the things you can
control.”
Humphreys said it was important to
realise mining was not risk free and that due
diligence was meant to highlight such risks
and seek a collective way forward to manage
those through developing consensus between
the interested and af ected parties where
possible.
“It should not be a never-ending process
in search of the perfect risk-free project,”
he said.
“Companies’ funds are limited so there
are always compromises to be made in
dei ning those elements, which categorise
as conditions precedent and conditions
subsequent.
“It’s an interactive process. A process that
evolves and sometimes you need to make
judgement calls to address the unexpected.”
Lynn said forward planning was a must.
“Plan your due diligence up front and
think through exactly what you are trying to
achieve so you are not chasing a rabbit down
a hole,” he said.
“h ink what’s important to the deal.
Once you have decided that, coordinate
an approach and always validate the
information you look at.
“I have seen plenty of i nancial models that
look beautiful and present well on paper, but
when you start looking at the numbers, they
are l awed because someone hasn’t actually
checked the model.”Being diligent
A panel of industry experts has probed
the “Lemon Problem” facing the mining industry.http://www.miningmonthly.com December 2017 AMM 45MANAGEMENT
Careful due diligence
can help sift out the lemons.Modified images: iStock.com/serebryakova, Nastco